Question

Zola borrows $1000. To repay the amount, she makes 12 equal monthly payments of $95. Compounding is done monthly. Determine nominal interest rate. Hint use the excel formula RATE to find the monthly effective interest rate. Then convert that to the nominal rate. Remember nominal interest does not account for sub-period compounding. (EX: effect monthly interest is 3%, the nominal rate is 3*12 = 36%)

Answer 1

Answer:

Effective monthly rate 2.076%

Yearly nominal rate: 24,912%

Explanation:

In excel we have to specify the number of period. The amount we borrow and the payment we are doing This should be negative as represent a cash outflow.

This is solving for the rate of the annuity for 95 of 12 months that discounted at X rate gives 1,000 as the present value:

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

$95 \times \frac{1-(1+r)^{-10} }{rate} = 1000$

we write on A1

=RATE(12;1000;-95)

and we will receive 2.076% as answer

Now to convert into nominal:

2.076 x 12 = 24,912%