Converting Nominal Interest Rates to Different Compounding Periods

✔ StudyForce.com
✔ Biology-Forums...
✔ Ask questions here: Biology-Forums...
Follow us:
▶ Facebook: / studyforceps
▶ Instagram: / biologyforums
▶ Twitter: / studyforceps
Sometimes the compounding period of the interest on a loan will not match the when deposits are expected to be made. For example, you are expected to make monthly mortgage payments, but the interest is compounded semi-annually. In cases like these, we must convert the nominal rate to an equivalent rate that matches the timing of the cash flows.
Q1. Find the equivalent rate of interest for a loan rated at 8% compounded semi-annually to interest compounded annually.
Note: When finding the equivalent annual rate, it is called the effective annual rate.
Q2. Find the equivalent rate of interest for a loan rated at 3.5% compounded monthly to interest compounded semi-annually.

[@timelygoose]

Thank you sir!

[@ammanuelabraham3487]

YOU'RE A HERO!!!

[@pearlolatunde206]

Thank you so much❤❤❤❤ This was very helpful

[@crptobreakout4196]

great video

[@jeremienz3765]

how can we have a monthly compound interest 3,5% and 6 months later( semi-annually) and having again the semi-annual interest close to 3.5%. if we want to have an idea about the range where our i' will be located, we can sum up the monthly interest, so (3.5+3.5+3.5+3.5+3.5+3.5)= 21% so our interest should not be less than 21% after 6 months. how can you explain that?

[@StudyForceOnline]

If your interest is being compounded monthly for the first 6 months, you find how much your principal will mature to after 6 months. Then use this value as your new principle at 3.5% compounded semi-annually until your next maturity date. Does that help?

[@jeremienz3765]

@@StudyForceOnline i have a question from my book, and it's tricky to solve maybe you can explain to me how to sovle it if you don't mind. $5000 per quarter for 6 years, 1% per month. I would like to know the effective rate for quarter

[@StudyForceOnline]

@@jeremienz3765 In this example, the cash flow isn't matching the compounding interest period, so we change the interest so that it is compounded quarterly instead of monthly. (1 + 0.01/12)^12 = (1 + i/4)^4 4[((1 + 0.01/12)^12)^(1/4) - 1] = i Therefore, i = 0.01000833565 Does that help?

[@jeremienz3765]

@@StudyForceOnline yes, it does. Thank you

[@eekanspok-oq8xm]

Could you please help me with this one? Three banks X, Y and Z, each offers a different effective interest rate on its saving account. (Hint: Assume 1 year to be 366 days). Bank Nominal Interest Rate Compounding Period X 8.25% compounded daily Y 8.25% compounded Monthly Z 8.30% compounded Quarterly

[@StudyForceOnline]

@@eekanspok-oq8xm biology-forums.com/index.php?topic=2095687 Hope this helps

[@eekanspok-oq8xm]

@@StudyForceOnline thank u so much for answering and for being so kind. Oops I forgot to type the questions... A) for each 3 banks find effective semi-annual interest rate B) how much interest would you get after 3 years on a $5000 deposit made now? (Hint: use the interest calculated in A).

[@StudyForceOnline]

@@eekanspok-oq8xm Full solution can be found here. biology-forums.com/index.php?topic=2095687

[@eekanspok-oq8xm]

@@StudyForceOnline you are awesome thank u so much

[@moyadanison4791]

Promo*SM 🤘