TYPES OF

RATES
LEARNING
OBJECTIVES › Solve problems involving compound
interest
› Compute nominal and effective rate
› Compare different varieties of
compound interest
 THREE KINDS OF RATES

PERIODIC RATE (i) NOMINAL RATE (J) EFFECTIVE RATE (e)

- it is the rate used to - the stated annual - the annual rate of
compute compound rate of interest when interest when the
interest factors, and it the conversion period conversion period is
is equal to interest is other than a year. one year.
rate divided by the
conversion period.
EXAMPLE 1
Berong has P100,000 to invest. 
Will he deposit the amount in the
bank paying 8% compounded
semi-annually or invest the money
in an investment firm paying 7%
compounded quarterly?
EXAMPLE 2
If you have P150,000 to invest,
what would be the difference in
interest rate in one year, if you
invest at 10% compounded
quarterly and 10% converted
monthly?
EXAMPLE 1
What nominal rate compounded
monthly, will yield an effective rate
of 5.5%?
EXAMPLE 2
When interest is compounded
monthly, find the nominal rate if
the effective rate is:
  a. 6.5 %
  b. 5/12 %
  c. 1 ¾ %
EQUIVALENT
RATES (eq)
› If two rates produce
equal interests on the
same principal amount in
the same period of time.
CASE 1 • To determine the compound interest rate
equivalent to another compound interest rate.
EXAMPLE 1
What rate compounded semi-
annually is equivalent to 6%
compounded monthly?
EXAMPLE 2
What rate converted monthly is
equivalent to 9.2% compounded
quarterly?
EXAMPLE 3
If you are to invest P500,000 at
14% converted semi-annually for
7 years, what rate compounded
quarterly could you just as well
invest your money?
CASE 2 • To determine the simple interest rate
equivalent to compound interest rate.
EXAMPLE 1
What simple interest rate is
equivalent to 5 ½ % compounded
semi-annually, if money is
invested for 5.5 years?
EXAMPLE 2
Find the simple interest rate
equivalent to 10% compounded
quarterly for 3 years and 3 months.
CASE 3 • To determine the compound interest rate
equivalent to a given simple interest rate.
EXAMPLE 1
What rate compounded quarterly is
equivalent to simple interest rate:

  a.) 7 ½ % for 7 years

  b.) 13.5% for 8 years and 6 months
EXAMPLE 2
Ms. Castro plans to invest P100,000
at 12 ½ % simple interest for three
years. At what rate compounded
semi-annually could she just as
well invest for the same period of
time?
If term is 15 months, what
rate compounded quarterly
is equivalent to 12%
a.) simple interest?
b.) compounded semi
annually?