Question

A local store charges 11/2% each month on the unpaid balance for its charge account. What nominal annual interest rate is being charged? What is the effective interest rate?

Answer 1

$18\%$ compounded monthly

– interest rate per month: i =$18\%/12 = 1.5\%$

– no. interest periods per year:$N = 12$

Suppose that you invest $1,000 for 1 year at 18% compounded monthly.

$F= \$1,000 (1 + i)^N = \$1,000 (1 + 0.015)^{12}$

$= \$1,195.60$

$i = 0.1956——>19.56$ %