Chapter 4, Problem 1P

To determine

Calculate the nominal interest rate.

Explanation of Solution

Time period is denoted by n and the interest rate is denoted by i. Nominal interest rate (in) can be calculated as follows.

$\begin{array}{c}\text{in}={\text{i}}_{\text{Per month}}\times {\text{Month}}_{\text{In year}}\\ =\text{0}\text{.013}\times \text{12}\\ \text{=0}\text{.156}\end{array}$

Nominal interest rate is 15.6%.

Effective interest rate (ie) can be calculated as follows.

$\begin{array}{c}\text{ie}={\left(1+{\text{i}}_{\text{Per month}}\right)}^{{\text{Month}}_{\text{Per year}}}-1\\ ={\left(1+0.013\right)}^{12}-1\\ =0.1677\end{array}$

Effective interest rate is 16.77%.