1 / 1

Effective Interest Calculations

Nominal rates can be converted into effective rates via the following equation:. i = (1 + r / m) m – 1 Where : i = effective interest rate for any time period r = nominal rate for same time period as i m = no. times interest is comp’d in period specified for i.

prem
Download Presentation

Effective Interest Calculations

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Nominal rates can be converted into effective rates via the following equation: i = (1 + r / m)m – 1 Where : i = effective interest rate for any time period r = nominal rate for same time period as i m = no. times interest is comp’d in period specified for i Example: For an interest rate of 1.2% per month, determine the nominal and effective rates (a) per quarter, and (b) per year Effective Interest Calculations Solution: (a) Nominal r / quarter = (1.2)(3) = 3.6% per quarter Effective i / quarter = ( 1 + 0.036/ 3)3 – 1 = 3.64% per quarter (b) Nominal i /yr = (1.2)(12) = 14.4% per year Effective i / yr = (1 + 0.144 / 12)12 – 1 = 15.39% per quarter

More Related