Applications of Nominal and Effective Rates of Interest (UMAP)

The purpose of this module is to: 1) introduce the terms nominal rate and effective rate; 2) show how they are used in banking practices, in discussing the rate of inflation, and in other aspects of everyone's life; and 3) show how these terms are often misused in advertising and by the media. Students will develop an understanding of the terms nominal rate and effective rate and learn how these terms are used in the everyday life of a consumer.

Table of Contents:

1. INTRODUCTION

2. NOMINAL RATE AND EFFECTIVE RATE
2.1 Definitions, Formulas, and Review
2.2 Effective Rates for Comparison
2.3 Compounding Daily and Effective Rate
2.4 Compounding Continuously and Effective Rate
2.5 Nominal and Effective Rates of Inflation
2.6 Nominal and Effective Rates in Other Areas

3. CONCLUSION

4. MODEL EXAM

5. ANSWERS TO EXERCISES

6. ANSWERS TO MODEL EXAM