Have a look at This Article to get a detailed idea of the nominal and effective interest rate. This interest rate is called the Effective Interest Rate. What the bank said was your Nominal Interest Rate, but due to compound interest monthly, you’re paying more than the nominal interest rate. But the bank said that your Annual Percentage Rate was 12%. In this way, at the end of the 3 rd month, your Principal + Interest will be: $10,000 x (1 + 0.01) ^ 3 So, for the 2 nd month, your principal will be $10,100.Īt the end of Month 2: your Principal + Interest will be = $10100 + $10100 x 1% = $10201Īs I want to make a formula from the above statement, I am going to restate the above line in the following way: Here, I am assuming that you did not pay the interest ($100 in this case) for the first month. Annual Percentage Rate/Nominal Interest Rate: 12%
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