HomeworkLib
Question

Nominal interest rate and extending credit

As a jewelry store manager, you want to offer credit, with interest on outstanding balances paid monthly. To carry receivables, you must borrow funds from your bank ata nominal 9%, monthly compounding. To offset your overhead, you want to charge your customers an EAR (or EFF%) that is 2% more than the bank is charging you. What APRrate should you charge your customers?
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1
EAR = (1+i)^n - 1
SO Bank Borrowing has an EAR = (1+9%/12)^(1*12) - 1 =9.38% annual

So Owner should charges his customers an EAR = 9.38%+2% = 11.38% annual


answered by: Carlita
0 0
Add a comment
Know the answer?
Add Answer to:
Nominal interest rate and extending credit
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Effective versus nominal interest rates

    Effective versus nominal interest ratesBank A pays 7% interest compounded annually on deposits, while Bank B pays 6% compounded daily.Based on the EAR (or EFF%), which bank should you use?-Select-IIIIIIIVVItem 1You would choose Bank A because its EAR is higher.You would choose Bank B because its EAR is higher.You would choose Bank A because its nominal interest rate is higher.You would choose Bank B because its nominal interest rate is higher.You are indifferent between the banks and your decision will...

  • Effective versus nominal interest rates Bank A pays 9.5% interest compounded annually on deposits, while Bank...

    Effective versus nominal interest rates Bank A pays 9.5% interest compounded annually on deposits, while Bank B pays 9% compounded daily. a. Based on the EAR (or EFF%), which bank should you use? I. You would choose Bank A because its EAR is higher. 11. You would choose Bank B because its EAR is higher. III. You would choose Bank A because its nominal interest rate is higher IV. You would choose Bank B because its nominal interest rate is...

  • Universal Bank pays 6% Interest, compounded annually, on time deposits. Regional Bank pays 5% interest, compounded...

    Universal Bank pays 6% Interest, compounded annually, on time deposits. Regional Bank pays 5% interest, compounded quarterly a. Based on effective interest rates, in which bank would you prefer to deposit your money? 1. You would choose Regional Bank because its EAR (or EFF%) is higher. II. You would choose Regional Bank because its nominal interest rate is higher. TIL. You are indifferent between the banks and your decision will be based upon which one offers you a int for...

  • eBook Bank A pays 7% interest compounded annually on deposits, while Bank B pays 6.5% compounded...

    eBook Bank A pays 7% interest compounded annually on deposits, while Bank B pays 6.5% compounded daily. a. Based on the EAR (or EFF%), which bank should you use? b. Could your choice of banks be influenced by the fact that you might want to withdraw your funds during the year as opposed to at the end of the year? Assume that your funds must be left on deposit during an entire compounding period in order to receive any interest

  • Bank A pays 3% interest compounded annually on deposits, while Bank B pays 2.25% compounded daily....

    Bank A pays 3% interest compounded annually on deposits, while Bank B pays 2.25% compounded daily. a. Based on the EAR (or EFF%), which bank should you use? You would choose Bank A because its EAR is higher. You would choose Bank B because its EAR is higher. You would choose Bank A because its nominal interest rate is higher. You would choose Bank B because its nominal interest rate is higher. You are indifferent between the banks and your...

  • Bank A pays 6% interest compounded annually on deposits, while Bank B pays 5.75% compounded daily....

    Bank A pays 6% interest compounded annually on deposits, while Bank B pays 5.75% compounded daily. a. Based on the EAR (or EFF%), which bank should you use? You would choose Bank A because its EAR is higher. You would choose Bank B because its EAR is higher. You would choose Bank A because its nominal interest rate is higher. You would choose Bank B because its nominal interest rate is higher. You are indifferent between the banks and your...

  • Find the present value of $700 due in the future under each of these conditions: a....

    Find the present value of $700 due in the future under each of these conditions: a. 15% nominal rate, semiannual compounding, discounted back 8 years. Do not round intermediate calculations. Round your answer to the nearest cent. b. 15% nominal rate, quarterly compounding, discounted back 8 years. Do not round intermediate calculations. Round your answer to the nearest cent. c. 15% nominal rate, monthly compounding, discounted back 1 year. Do not round intermediate calculations. Round your answer to the nearest...

  • Time Value of Money: Comparing Interest Rates Different compounding periods, are used for different types of...

    Time Value of Money: Comparing Interest Rates Different compounding periods, are used for different types of investments. In order to properly compare Investments or loans with different compounding periods, we need to put them on a common basis. In order to do this, you need to understand the difference between the nominal interest rate (INOM) and the effective annual rate (EAR). The Select interest rate is quoted by borrowers and lenders, and it is also called the annual percentage rate...

  • 11. Problem 5.27 Click here to read the eBook: Semiannual and Other Compounding Periods Click here...

    11. Problem 5.27 Click here to read the eBook: Semiannual and Other Compounding Periods Click here to read the eBook: Comparing Interest Rates EFFECTIVE VERSUS NOMINAL INTEREST RATES Bank A pays 8.5% interest compounded annually on deposits, while Bank B pays 7.5% compounded daily. a. Based on the EAR (or EFF%), which bank should you use? I. You would choose Bank A because its EAR is higher. II. You would choose Bank B because its EAR is higher. III. You...

  • PLEASE ANSWER THIS QUESTION AND MOST ANSWER TO QUANTITATIVE PROBLEM THANKS YOU Different compounding periods, are...

    PLEASE ANSWER THIS QUESTION AND MOST ANSWER TO QUANTITATIVE PROBLEM THANKS YOU Different compounding periods, are used for different types of investments. In order to properly compare investments or loans with different compounding periods, we need to put them on a common basis. In order to do this, you need to understand the difference between the nominal interest rate (INOM) and the effective annual rate (EAR). The -Select- v interest rate is quoted by borrowers and lenders, and it is...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT