Question: Describe the difference between nominal and effective interest rates. Under what circumstances will paying off a loan balance before maturity cause the effective interest rate

  1. Describe the difference between nominal and effective interest rates.
  2. Under what circumstances will paying off a loan balance before maturity cause the effective interest rate to be higher?
  3. Distinguish between nominal and real interest rates.
  4. Why would a lender charge a lower contract interest rate coupled with a front-end fee? Why not simply incorporate the effective rate into the contract rate?
  5. Because inflation causes real interest rates to be lower, won't lenders simply factor inflation into their contract rates so that the real rate remains constant? With rational borrowers and lenders, shouldn't adjustments for anticipated inflation cancel out inflation's impact?

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