Math Is Fun Forum

Nestea

Member

Registered: 2005-11-12

Posts: 9

Effective Interest

JenCo wants to drop the effective rate of interest on its credit card by 2.40%. If it currently charges a nominal rate of 5.75% compounded monthly, at what value should it set the new nominal rate?

I need help finding the nominal rate.

Last edited by Nestea (2005-12-12 14:58:27)

John E. Franklin

Member

Registered: 2005-08-29

Posts: 3,588

Re: Effective Interest

3.4489379%

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igloo myrtilles fourmis

John E. Franklin

Member

Registered: 2005-08-29

Posts: 3,588

Re: Effective Interest

I am guessing at the method, but here's how I got 3.4489379%.
.0575 ÷ 12
add one
raise to the 12th power (current result is effective rate about 1.059 or 5.9%)
Then work backwards with these ideas.
Subtract .024
raise to 1/12th power to get monthly rate
subtract one
multiply by 12
Bingo! You've got it.  0.034...

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igloo myrtilles fourmis

Ms. Bitters

Member

Registered: 2008-07-31

Posts: 19

Re: Effective Interest

JenCo wants to drop the effective rate of interest on its credit card by 2.40%. If it currently charges a nominal rate of 5.75% compounded monthly, at what value should it set the new nominal rate?

I need help finding the nominal rate.

Accordingly, the effective rate of a nominal rate of 5.75% compounded monthly is given by

If we take the statement “JenCo wants to drop the effective rate of interest on its credit card by 2.40%.” to mean
(100% - 2.40%)*w, then the new effective rate of interest that JenCo wishes to implement is 97.6% of w. The new nominal rate j can then be determined from the following equation:

Solving for j gives us: j ≈ .05615480096

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