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3+Dimensions+of+Interest+Rates

# 3+Dimensions+of+Interest+Rates - What interest rate am I...

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3 Dimensions of Interest Rates The APR (Simple, Quoted, etc.) rate is the annualized interest rate using simple interest Ignores compounding Most consumer loans (home mortgages, credit cards, student loans, car loans, etc.) utilize simple interest

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Nominal, quoted rate Annualized, no compounding Periodic rate Nominal / Compounding Effective Annual Rate Does account for compounding EAR = [(1 + (Inom/M)]M – 1 Inom = Nominal Rate M = Compounding periods in a year Inom / M = Periodic Rate
Problem My credit card claims my interest rate on carried balances is 9.2% APR.

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Unformatted text preview: What interest rate am I really paying? .092/12 = .0077 (1.077)12 – 1 = 1.0960 – 1 = .0960 = 9.60% Problem • Which one would I want to take (from the point of view of the borrower) • Lender A: 10.40%, compounded monthly • Lender B: 10.90%, compounded annually • Lender C: 10.50%, compounded quarterly Problem • I have an Effective Annual Rate of 11.72%, compounded quarterly. What is the Nominal, quoted rate in this case? .1172 = [(1+ (Inom/4))^4] -1 1.1172 = [(1+ (Inom/4))^4] 1.1172^1/4 = 1+ (Inom/4) 1.0281 = 1+ (Inom/4) .0281 = Inom/4...
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3+Dimensions+of+Interest+Rates - What interest rate am I...

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