Question

a. The monthly simple interest is 0.5%. What is the yearly simple interest rate?

b. The nominal monthly rate is 0.5%. What is the annual effective interest rate?

c. Jonathan borrow $1, 450 for one year at a discount rate X. He has the use of an extra $1, 320. Find X and the annual interest rate that this is equivalent to.

Answer 1

a) We can convert simple monthly interest later to yearly rate by multiplying with 12

Yearly Rate = Monthly Rate * 12

So, Yearly Rate = 0.5*12 = 6.0%

b) We can convert nominal monthly interest later to yearly rate by compounding for 12 months.

So, In our case rate per month is 0.5%, T is 12 months. So,

So, the Yearly effective rate is 6.16%.

c) The third part of this set is an incorrect question or some information is missing.