Question

1.a The annual interest rate is 8% with annual compounding. Please calculate effective annual rate, effective semi-annual rate, effective quarterly rate, effective monthly rate, effective weekly rate (1 year = 52 weeks), effective daily rate (1 year = 365 days).

1.b The annual interest rate is 8% with monthly compounding. Please calculate effective monthly rate, effective annual rate, effective semi-annual rate, effective quarterly rate.

Answer 1

ANSWER

1

A) ANNUAL INTERST RATE WITH ANNUAL COMPOUNDING = 8%

EFFECTIVE ANNUAL RATE = 8%

EFFECTIVE SEMI ANNUAL RATE = 8%/2 = 4%

EFFECTIVE QUARTERLY RATE = 8%/4 = 2%

EFFECTIVE MONTHLY RATE = 8%/12 =0.67%

EFFECTIVE WEEKLY RATE = 8%/52 = 0.15%

EFFECTIVE DAILY RATE = 8%/365 = 0.02%

B) EFFECTIVE ANNUAL RATE MONTHLY COMPOUNDING = 8%

EFFECTIVE SEMI ANNUAL RATE = (1+8%/2)² - 1 = 8.16%

EFFECTIVE QUARTERLY RATE = (1 + 8%/4)⁴ - 1 = 8.24%

EFFECTIVE MONTHLY RATE = ( 1 + 8%/12)¹² - 1 = 8.3%

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