Question

Suppose the annual effective interest rate on an account is 13.2%. Find the equivalent nominal interest rate compounded monthly, the effective monthly interest rate, the equivalent discount rate compounded monthly, and the effective monthly discount rate.

Answer 1

AER (i) = 13.2%

Equivalent nominal interest rate compounded monthly (APR): (1 + i) = (1 + APR/m)^m

where m = 12 (number of compoundings p.a.); i = 13.2%

APR = [(1+13.2%)^(1/12) - 1]*12 = 12.46%

Effective monthly interest rate = APR/12 = 12.46%/12 = 1.04%

Equivalent discount rate compounded monthly (d):

(1+i) = 1/(1-d)

d = 1 - (1/(1+i))

= 1 - (1/(1+13.2%)) = 11.66%

Effective monthly discount rate = ((1 + d)^(1/12)) -1 = ((1+11.66%)^(1/12)) -1 = 0.92%