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? a. 7. 250% b. 7. 496% c. 7. 510% d. 8. 700%.

Answer 1

The correct statement is that Sarah is paying interest compounded monthly at the rate of 7.496%.. So, the correct option from the above statement is B.  

Compound interest can be calculated by the way of applying the values to the formula given in the information.  

Compound Interest

• Compound interest is best defined with the terms as interest given on accrued interest or the accumulated interest in addition to the interest on the principalprincipal amount.

• The formula to calculate Compounded interest is as below,

• $\rm Compounded\ Interest = 10000(1+ \dfrac {0.0725}{12})^1^2\\\\\\\rm Compounded\ Interest =10000(1+0.006)^1^2\\\\\\\rm Compounded\ Interest =10749.58$

• The interest to be paid is calculated as $749.58 assuming that the principal was $10000 and the time for such loan was 1 year in the absence of information.

 

•  Calculating further, we can find that the effective rate of interest on such a loan is at the rate of 7.496%, which is rounded off to the nearest three decimal places.

Hence, the correct option is B that the actual interest paid by Sarah at the rate of 7.250% for the period of 1 year will be effectively 7.496%

 

To know more about compound interest, click the link below.

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