Question

Your APR is 10% compounded quarterly. Determine r, m, i, ia. Explain in words the difference and similarities between the effective rate approach and the nominal rate approach.  

Answer 1

*The effective interest rate (EIR)*

Effective annual interest rate, annual proportionate rate(AER) or simply effective rate is the interest rate on an advance or budgetary item rehashed from the nominal intrigue rate and communicated as the comparable loan fee if compound intrigue was payable every year financially past due.

It is utilized to contrast the financing costs among advances and diverse exacerbating periods, for example, week by week, month to month, half-yearly or yearly.

*The nominal interest rate*

or nominal pace of interest is both of two unmistakable things:

●The rate of interest before modification for inflation (in stand out from the real loan fee); or

●For loan costs "as expressed" without modification for the full impact of compounding (likewise alluded to as the nominal yearly rate). A financing cost is called nominal if the recurrence of aggravating (for example a month) isn't indistinguishable from the basic time unit in which the ostensible rate is cited (regularly a year).

It is otherwise called

"Annual percentage rate".

DIFFERENCES:

*Nominal interest rates vs Effective interest rates*
1.
● In nominal interest rates interest rates are stated as annual percentages where as in the
●Effevive interest rates actual interest earned or paid in a yr or some other period.
2.
●Nominal interest rate
does not include any consideration of compounding it is also known as Annual percentage rate(APR)
●Effective interest rate is calculated on the annual basis as the effective annual interest also knowm as annual percentage yield(APY).
3.
●In the nominal interest rate
Imterest may be compounded semi annually ,quarterly and monthly
●In the effective interest rate interest rate is compounded annually.

There are no similarities.

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