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28 January, 10:38

The number of compounding periods in one year is called compounding frequency. The compounding frequency affects both the present and future values of cash flows. An investor can invest money with a particular bank and earn a stated interest rate of 6.60%; however, interest will be compounded quarterly. What are the nominal, periodic, and effective interest rates for this investment opportunity?

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  1. 28 January, 14:28
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    Nominal: 6,60%

    Periodic: 1,65% quaterly

    Effective interes rate = 6,77%

    Explanation:

    The interest rate that give at the begining of the excersie is nominal 6.60%, now you have to calculate the others interest rates according with the inofmration of the coumponded period quaterly

    Periodic interest rate = (6,60%/4) = 1,65% quaterly

    Effective interes rate = ((1+quaterly periodic interest rate) ^ (4)) - 1

    Effective interes rate = ((1+1,65%) ^ (4)) - 1

    Effective interes rate = 6,77%
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