A company that makes modular bevel gear drives with a tight swing ratio for optimizing fork- lift vehicles was told that the interest rate on a loan would be an effective 3.5% per quarter, compounded monthly. The owner, confused by the terminology, asked you to help. What is the (a) APR, and (b) APY? (c) Explain how the EFFECT and NOMINAL functions can or cannot be used to find the APR and APY.

Question

What will be an ideal response?

Answer 1

(a) First find effective monthly rate; then find APR with m = 3 months/quarter
0.035 = (1 + r/3) 3 – 1
r/3 = (1 + 0.035) 1/3 – 1
= 1.153% per month
APR = 1.153*12
= 13.8% per year

(b) APY = (1 + 0.138/12) 12 - 1
= 14.71%
(c) = EFFECT(13.8%,12) displays the APY of 14.71% per year.
The NOMINAL functions displays only annual nominal or APR rates. Therefore, the
quoted effective 3.5% per quarter, compounded monthly can’t be entered to get the
correct answer of 13.8%. The effective APY of 14.71% can be entered into =
NOMINAL(14.71%,12) to display the APR of 13.8%, however.