Compute the stated interest rate on a promotional credit card if the effective i

Question

Compute the stated interest rate on a promotional credit card if the effective interest rate is 8.0%. Assume that interest is compounded (a) semi-annually and (b) quarterly, Compute the actual interest rate paid or earned on a mortgage loan if the bank states that the nominal rate is 12%, and the interest is compounded (a) semi-annually and (b) quarterly O RATE O EFFECT O RATE NOMINAL O DISC DISC NOMINAL O EFFECT Data Description Data Description 2 Compounded semi-annually 2 Compounded semi-annually Interest Rate Interest Rate 4 4 5 Compounded quarterly 6 5 Compounded quarterly Interest Rate Interest Rate

Explanation / Answer

Compounded semi-annually

Interest rate = ( 8 % / 2)

Interest rate = [ 1 + ( 0.08/2) ] 2 -1

Interest rate = 8.16%

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Compounded quarterly

Interest rate = ( 8 % / 4)  

Interest rate = [ 1 + ( 0.08/4) ] 4 -1

Interest rate = 8.24%

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Compounded semi-annually

Interest rate = ( 12 % / 2)

Interest rate = [ 1 + ( 0.12/2) ] 2 -1

Interest rate = 12.36%

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Compounded quarterly

Interest rate = ( 12 % / 4)  

Interest rate = [ 1 + ( 0.12/4) ] 4 -1

Interest rate = 12.55%

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