Nominal and Effective Interest Rates



Nominal and Effective Interest Rates

Given the bank offers 12% compounded monthly, find:

1) Monthly effective and nominal interest rates (1%, 1%).

2) Two-month (nominal) rate compounded monthly (2%) and two-month effective interest rate (2.01%).

3) Quarterly (nominal) rate compounded monthly (3%) and quarterly effective interest rate (3.03%).

4) Semiannual (nominal) rate compounded monthly (6%) and semi-annual effective interest rate (6.15%).

5) Semiannual (nominal) rate compounded quarterly (6.06%) and semi-annual effective interest rate (6.15%).

6) Nine-month (nominal) rate compounded monthly (9%) and nine-month effective interest rate (9.36%).

7) Nine-month (nominal) rate compounded every three months (9.09%) and nine-month effective interest rate (9.36%).

8) Yearly nominal and effective interest rates (12%, 12.68%).

9) 1½-year (nominal) rate compounded semi-annually (18.46%) and 1½-year effective interest rate (19.6%).

10) Two-year (nominal) rate compounded quarterly (24.24%) and 2-year effective interest rate (26.97%).

11) Three-year (nominal) rate compounded every 1½ years (39.2%) and three-year effective interest rate (43.07%).

In the compounding formulas (ex. (P/F,i,n), (P/A,i,n), etc.), which interest rate (nominal or effective) is appropriate to use? Is this always the case?

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