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stions Check My Work Click here to read the eBook: Semlannual and Other Compounding Perlods Click here to read the eBook: Comparing Interest Rates NOMINAL INTEREST RATE AND EXTENDING CREDIT O As a jewelry store manager, you want to offer credit, with interest on outstanding balances paid monthly To carry receivables, you must borrow funds from your bank at a nominal 496, monthly compounding. To offset your overhead, you want to charge your customers an EAR (or EFF%) that is 4% more than the bank O is charging you. What APR rate should you charge your customers? Round your answer to two declmal places. 4.1 % Hide Feedback Incorrect Check My Work ?Icon Key

Explanation / Answer

We need to find the effective annual rate (EAR) the bank is charging first.

Then, we can add 4% to this EAR to calculate the nominal rate that you should quote your

customers.

Bank EAR: EAR = (1 + INOM/M)M – 1 = (1 + 0.04/12)12 – 1 = 4.0742%.

So, the EAR you want to earn on your receivables is 8.0742%.

Nominal rate you should quote customers:

8.0742% = (1 + INOM/12)12 – 1

1.080742 = (1 + INOM/12)12

1.006492 = 1 + INOM/12

INOM = 0.006492(12) = 7.79%.

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