Question

The nominal rate on sarah’s loan is 7.250%. if the interest is compounded monthly, what rate of interest is sarah actually paying?

Answer 1

Montlhy rate = nominal rate / 12 = 7.250% / 12 = 0.07250/12

Compunded factor:  [1 + 0.0725/12]^12 =  1.07496

Actual rate of interest = [1.07496 - 1] = 0.07496 = 7.496%

Answer: 7.496%