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Effective & Nominal Rate, Equivalent Rates

This document discusses different types of interest rates: 1) Periodic rate is the rate used to compute compound interest factors and is equal to the interest rate divided by the conversion period. 2) Nominal rate is the stated annual rate of interest when the conversion period is other than a year. 3) Effective rate is the annual rate of interest when the conversion period is one year. It provides examples of computing compound interest using these rates and determining equivalent rates that would produce the same interest over a given period.

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kaye carranceja
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457 views21 pages

Effective & Nominal Rate, Equivalent Rates

This document discusses different types of interest rates: 1) Periodic rate is the rate used to compute compound interest factors and is equal to the interest rate divided by the conversion period. 2) Nominal rate is the stated annual rate of interest when the conversion period is other than a year. 3) Effective rate is the annual rate of interest when the conversion period is one year. It provides examples of computing compound interest using these rates and determining equivalent rates that would produce the same interest over a given period.

Uploaded by

kaye carranceja
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

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?

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