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The value of a 7 year lease that requires payments of $600 made at the beginning...

The value of a 7 year lease that requires payments of $600 made at the beginning of every month is $48,000. What is the nominal interest rate compounded monthly?

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Answer #1

The nominal interest rate compounded monthly is calculated using RATE function in Excel :

nper = 7 * 12 (7 years lease with 12 monthly payments each year)

pmt = -600 (Monthly payment. This is entered with a negative sign as it is a cash outflow)

pv = 48000 (value of lease today)

fv = 0 (value of lease at end is zero)

type = 1 (Each payment made at beginning of month, hence it is an annuity due)

The RATE calculated is the monthly rate. To get nominal interest rate compounded monthly, we multiply by 12.

Nominal interest rate compounded monthly is 1.42%

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