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What are the nominal and effective annual interest rates for the two alternative payment plans from the orthodontist?

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Your child's orthodontist offers you two alternative payment plans. The first plan requires a $4,000 immediate up-front payment. The second plan requires you to make monthly payments of $137.41, payable at the end of each month for 3 years. What nominal and effective annual interest rate is built into the monthly payment plan?

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Solution Summary

The solution explains how to calculate the nominal and effective annual interest rate. Calculations are also provided in the attached Excel sheet.

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The interest rate would be such that the present value of the payments would equal $4,000 to be paid now. We use the PV of annuity ...

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