Question

1. The nominal rate on Sandra's loan is 7.125%. If the interest is compounded monthly, what rate of

Answer 1

Answer:

She is actually paying a rate of 7.36% of interest.

Step-by-step explanation:

The real interest rate, as a decimal, is given by:

$I = (1 + \frac{r}{n})^{n}$

In which r is the interest rate and n is the number of compoundings during an year.

The nominal rate on Sandra's loan is 7.125%, compounded monthly:

This means that $r = 0.07125, n = 12$

So

$I = (1 + \frac{0.07125}{12})^{12} = 1.0736$

As a percentage: 1.0736*100 = 107.36% - 100% = 7.36%

She is actually paying a rate of 7.36% of interest.