1.Below is a common problem in which the payments are not the same time period as the interest rate or the time period. In order to compute the payment correctly, you need to adjust all variables so that they are the same period as the payment (note some calculators might do this automatically, you can set them so they do not automatically make this correction).

So if the problem has monthly payments, but the problem has an annual interest rate and time period over years, you would need to divide the interest by 12 and multiply the time period by 12.

You would make similar adjustments if the payment was per day or semi annual.

You are considering buying a new motorcycle. You are going to borrow $10659. If you can negotiate a nominal annual interest rate of 6 percent (i.e. 6% equals the APR) and you wish to pay for the car over a 3-year period, what are your monthly car payments?

2. Like cash flows, the interest rate can also be compounded over time. When compounding the interest rate, we are simply accounting for the interest being earned on interest over a time period.

One example of the computation of an annual compounded or effective interest rate is associated with your credit card.

You recently received a letter from a local bank that offers you a new credit card that has no annual fee. It states that the annual percentage rate (APR) is 9 percent on outstanding balances. Note that the annual percentage rate does not account for compounding, rather the APR is simply the periodic rate times the number of periods. What is the effective annual interest rate? (This rate is subject to monthly compounding.)

Record your answer as a decimal.