Question

Stuck on the question. Please show work.

22. You plan to buy a new HDTV. The dealer offers to sell the set to you on credit. You will have 3 months in which to pay, but the dealer says you will be charged a 15 percent interest rate; that is, the nominal rate is 15 percent, quarterly compounding. As an alternative to buying on credit, you can borrow funds from the bank, but the bank will make you pay interest each month. At what nominal bank interest rate should you be indifferent between the two types of credit? 13.7643% b. 14.2107% 14.8163% d. 15.5397% 15.3987% a. c. e.

Answer 1

Let us assume nominal rate be x

We need to compute x such that effective rate is equal

(1 + x/12)^12 = ( 1+ 15%/4)^4

(1 + x/12) = (1 + 15%/4) ^(1/3)

(1 + x/12) = 1.01234

x =14.8163%