Calculating Effective Intrest Rate

Thresher

So, I am taking an economics class this term and I have been doing ok so far. TVM, Debit ratios and the such. But last week I took one on loans that has me a little stumped. And while this is my first post, accounting will be something huge to be in my career once I finish school.

The question was asking what the effective quarterly intrest rate on a loan of 10% compounded montly would be. So I came up with EFI= (1+).10/12)^3-1
With the idea of it being 12 (compounding statment, 3 quarterly as we have 3 months per quarter (and everything else is in months). Which gave me 0.025208912 . Then * 100 which gave me 2.52 as the EFI. But this is wrong, so where did I screw up?

As I am then asked to figure out the monthly payment of said loan above (10%), if the intrest is compounded weekly and I want to make 14 payments.

Which gave me 1000(.025(1.025)^14) / ((1.025)^14-1) = 85.536 or rounded up to \$85.54 But again I got this one wrong too. which leads me to beleve I missed something from above in my first question.

Please note: yes these are questions taken from an old test and yes the test has been turned in and graded. But our next chapter builds on this and I would like to see where I messed up so I can correct things. So while the awnser is nice, I want to better understand where I am screwing up.

Thank you if you can explain.

kirby

VIP Member
Are you certain that the 2.52 is wrong?

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bklynboy

VIP Member
2.52 is the correct amount. Think of it this way, on an annual basis this would give you 10.471 compounding monthly ((1+).10/12)^12-1) and means the interest on \$1000 annually is \$104.71. Applying your answer of 2.52 as a quarterly effective interest rate also gives you \$104.71 as the cumulative interest (I proved this out in Excel).

Can you ask your professor why this is not the right answer and what he says is correct so that we can be more helpful?