What is the periodic rate if the nominal rate of 12% is compounded monthly? What is...

What is the periodic rate if the nominal rate of 12% is compounded monthly?

What is the periodic rate if the nominal rate of 6% is compounded quarterly?

When is the nominal or annual stated rate the same as the effective rate?

Solutions

Expert Solution

a) Periodic rate when nominal rate is 12% compounded monthly, its periodic rate is 1%. When you convert the percentage to a decimal and add 1, the sum is 1.01. This number to the 12th power is 1.127. When you subtract 1 from this number, the difference is 0.127 or 12.7%. The effective rate is slightly higher than the nominal rate.

b) Periodic rate when nominal rate is 6% compounded quarterly, its periodic rate is 1.5%. When you convert the percentage to a decimal and add 1, the sum is 1.015. This number to the 12th power is 1.196. When you subtract 1 from this number, the difference is 0.196 or 19.6%. The effective rate is higher than the nominal rate.

c)Effective and nominal rates can be the same when interest calculations involve simple interest whereas in compound interest effective and nominal rates will never be the same. While in a simple interest calculation effective and nominal rates can be the same, effective and nominal rates will never be the same in a compound interest calculation

jeff jeffy answered 1 month ago

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