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 Interest rate statement

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 Nominal interest rate

If i% = 1% per month

Nominal interest rate per year (r ) is
r = 1% * 12 = 12% per year
If i%=3% per quarter
Nominal interest rate per year (r ) is
r = 3% *4=12% per year

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 Nominal interest rate
 The nominal interest rate , may be stated for year, 6 months,
quarter(3 month), month, week, day ….etc

Example : if r=1.5% per month ,What are the nominal interest

rates per ( 2 years , year, semiannual , quarter)
 2 years r =1.5%*24 = 36% per 2 years
 Year r =1.5%*12 = 18% per 1 years
 Semiannual r=1.5%*6 = 9% per semiannual
 Quarter r =1.5%*3 = 4.5% per quarter

 Note: for nominal rates, there is no mention for the compounding

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 Effective interest rate (i)

 Effective interest rate (i) it is the actual rate

that applies for a stated period of time.

 Effective interest rate (i) takes compounding

into account (effective rates can be obtained
from nominal rates)

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Example : for i=12% per year , compounded monthly, determine the
nominal and effective rates for : 6 month, quarter

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Example : A dot-com company plans to place money in anew
venture capital fund that currently returns 18% per year,
compounded daily. What effective rate is this : yearly ,
semiannually


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If the nominal interest rate = 14% per year, compounded
semiannually and the company deposit money each month

t = year , CP = semiannual , PP= month PP < CP

If i=14% per year, compounded quarterly , and the money
deposited each year into a saving account.

t = year , CP = quarter, PP= year PP > CP

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 If i = 16% per year, compounded quarterly and the company
deposit money each quarter into a saving account

t = year , CP = quarter , PP= quarter PP =CP

Note : to perform the equivalence computation, the CP

and PP must be placed on the same time basis and the
interest rate be adjusted accordingly

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 Example: i=12% per year, compounded quarterly, find P

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 Example: i=12% per year, compounded quarterly, find P

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CP=quarter , PP= month , PP<CP
According to the policy 1 , the above cash flow
becomes

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

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

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 H.W
4.5 , 4.7
4.40 , 4.41
4.43 , 4.44
4.46 , 4.49
4.50 , 4.54
4.57
Additional problems 4.58-4.72

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H.W

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H.W

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H.W

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H.W

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H.W

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H.W

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H.W

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H.W

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H.W

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H.W

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H.W

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