Group 3: (P.

7-9)

MONEY AND INTEREST

Furthermore, it must be noted that two nominal rates of interest are equal if their
effective rates are equal. This is also the way on how to convert one nominal rate
of interest to other method of compounding.
Problem 1 (CE Board May 1998)
Compute the equivalent rate of 6% compounded semi-annually to a rate
compounded quarterly.
Solution:
ie ¿

n1 =4 n1 =2
4 2
j 0.06
{ }
1+
4
−1= 1+ { 2 }
−1

j = 0.0596
j = 5.96% compounded quarterly
ANSWER: Remark 6% compound semi – annually = 5.96% compounded quarterly.

Problem 2 (EE Board, October 1994)

A bank pays 1.0% interest on savings account four times a year. Find the effective
annual interest rate.
Solution:
Using formula 1-6,
i e =( 1+i )n −1
1

where,
 i = 1.0% per quarter = 0.01
n1 =4

so,
i e =( 1+0.01 )4 −1

i e =0.0406∨4.06 %

ANSWER: i e =0.0406∨4.06 %

Problem 3 (CE Board May 1994)

Accumulate P 5,000 for 10 years at 8% compounded quarterly. Find the
compounded interest at the end of time.
Solution:
Using formula 1-3,
n
F=P ( 1+i )

where,
P = P 5,000
j = 8% compounded quarterly
n1 =4

j 8%
i= = =2 % per quarter=0.02
n1 4

n =? quarter

n = 10 years ( 4 qyear
uarters
)=40 quarters
so,
40
F=5,000 ( 1+ 0.02 )

F=P 11,040.20
Using Formula 1-2,
F=P+ I

I =F−P

I =11,040.20−5,000

I =P 6,040.20

ANSWER: I =P 6,040.20

Problem 4 (CE Board May 1995)

How long in years will it takes money to quadruple if it earns 7% compounded
semi – annually?
Solution:
Using Formula 1-3
n
F=P ( 1+i )

Let, x=P
4 x=F

j=7 % compounded semi−annually

n1 =2

7%
i= =3.5% per semi−annual period
2
n=? semi−annual periods

so,
n
4 x=x ( 1+0.035 )
n
4= (1.035 )

take logarithm of both sides,

 n
ln 4=ln ( 1.035 )

ln 4=n ln 1.035

ln 4
n= =40.29 semi−annual periods∈ years
ln 1.035

1 year
n=( 40.29 semi−annual periods ) {2 semi−annual periods }
n=20.15 years

ANSWER: n=20.15 years