Chapter 5, Problem 28P

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Chapter
Section

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

# 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 at a nominal 9%, monthly compounding. To offset your overhead, you want to charge your customers an EAR (or EFF%) that is 3% more than the bank is charging you. What APR rate should you charge your customers?

Summary Introduction

To Calculate: Nominal rate which has to be charged from customers.

Introduction:

Nominal rate of interest:

It is the interest rate which has been quoted without adding the inflation into account. It also did not include the compounding of interest.

Explanation

Formula to calculate effective annual rate is,

EAR=(1+INOMM)Mā1

Where,

• EAR is the effective annual rate.
• INOM is the nominal interest rate.
• M is the compounding period.

Substitute 9% for INOM and 12 for M.

EAR=(1+0.0912)12ā1=1.09381ā1=0.09381Ā orĀ 9.38%

Effective annual rate is 9.38% but the investor wants effective annual rate plus 3% so it will be 12

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