Katerina Unger wants to purchase a set of furniture worth $3,000. She plans to finance the furniture for two years. The furniture store tells Katerina that the interest rate is only 1 % per month, and her monthly payment is computed as follows.
■ Installment period = 24 months.
■ Interest = 24(0.01) ($3,000) = $720.
■ Loan processing fee = $25.
■ Total amount owed = $3,000 + $720 + $25 = $3,745.
■ Monthly payment = $3,745/24 = $156.04 per month.
(a) What is the annual effective interest rate that Katerina is paying for her loan transaction? What is the nominal interest (annual percentage rate) for the loan?
(b) Katerina bought the furniture and made 12 monthly payments. Now she wants to pay off the remaining installments in one lump sum (at the end of 12 months). How much does she owe the furniture store?