This document discusses equivalent interest rates and provides examples of computing equivalent rates. It defines equivalent rates as two annual rates with different conversion periods that will earn the same maturity value for the same time. Examples show computing the effective rate equivalent to a nominal rate compounded quarterly, and equivalent rates for various nominal rates compounded at different intervals. The document stresses rounding equivalents rates to six decimal places for precision.
This document discusses equivalent interest rates and provides examples of computing equivalent rates. It defines equivalent rates as two annual rates with different conversion periods that will earn the same maturity value for the same time. Examples show computing the effective rate equivalent to a nominal rate compounded quarterly, and equivalent rates for various nominal rates compounded at different intervals. The document stresses rounding equivalents rates to six decimal places for precision.
This document discusses equivalent interest rates and provides examples of computing equivalent rates. It defines equivalent rates as two annual rates with different conversion periods that will earn the same maturity value for the same time. Examples show computing the effective rate equivalent to a nominal rate compounded quarterly, and equivalent rates for various nominal rates compounded at different intervals. The document stresses rounding equivalents rates to six decimal places for precision.
LESSON OUTLINE: ▪ Compute equivalent rates using nominal rate and/or effective rate of compound interest. DEFINITION OF TERMS ▪ Equivalent rates – two annual rates with different conversion periods that will earn the same maturity value for the same time/term.
▪ Nominal rate – annual interest rate (may be
compounded more than once a year)
▪ Effective rate – rate when compounded
annually will give the same compound each year with the nominal rate; denoted by 𝑖 1 . EXAMPLE #1 What effective rate is equivalent to 10% compounded quarterly?
Answer: Hence, the effective rate equivalent to 10%
compounded quarterly is 10.3813%. NUMBER OF DECIMAL PLACES When solving for an equivalent rate 𝑗, it is important to make it very precise. Thus, when solving for an equivalent rate, six or more decimal places will be used. EXAMPLE #2 Complete the table by computing for the rates equivalent to the following nominal rates. Round off your answer to six decimal places.
EXAMPLE #3 What nominal rate compounded monthly is equivalent to 12% compounded annually? Round off your answer to six decimal places.
Answer: The nominal rate compounded monthly
equivalent to 12% compounded annually is 11.3868%. EXAMPLE #4 What simple interest rate is equivalent to 10% compounded semi-annually at the end of year 1?
Answer: The simple interest rate equivalent to 10%
compounded semi-annually is 10.25%. THANK YOU! FOR YOUR ATTENTION