EECO101

ENGINEERING ECONOMY
Compound
Interest
Equivalent Rates
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.
𝑚
𝐺 𝑚𝑒
Formula: 𝑒𝑞 = 𝑚𝑒 1 +𝑚 −1

where
eq - the unknown rate
me - the conversion period of the missing rate
G - the given compound interest rate
m - the conversion period of the given rate
What rate compounded semi-annually is
equivalent to 6% compounded monthly?

2 12
𝑟 0.06
1+ = 1+
2 12

𝑟 = 6.08%
What rate converted monthly is equivalent to 9.2%
compounded quarterly?
12 4
𝑟 0.092
1+ = 1+
12 4

𝑟 = 9.13%
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?

4 2
𝑟 0.14
1+ = 1+
4 2

𝑟 = 13.76%
Case 2
• To determine the simple interest rate equivalent to
compound interest rate.

1+𝑖 𝑛 −1
Formula: 𝑟𝑠 =
𝑡

where: rs - the unknown simple interest

i - the periodic rate
n - the total number of conversion
periods for the whole term
t - the term or time of the
investment
What simple interest rate is equivalent to
5 ½ % compounded semi-annually, if
money is invested for 5.5 years?
𝑛
1 + 𝑟𝑠 𝑡 = 1 + 𝑖

11
0.055
1 + 𝑟𝑠 (5.5) = 1 +
2

𝑟𝑠 = 6.32%
Find the simple interest rate
equivalent to 10% compounded
quarterly for 3 years and 3 months.
𝑛
1 + 𝑟𝑠 𝑡 = 1 + 𝑖

13
3 0.1
1 + 𝑟𝑠 3 = 1+
12 4

𝑟𝑠 = 11.65%
Case 3
• To determine the compound interest rate
equivalent to a given simple interest rate.
1
Formula: 𝑟𝑐 = 𝑚 1 + 𝑟𝑠 𝑡 𝑛 −1

where: rc - the unknown compound interest

m - conversion period of the missing
rate
rs - the given simple interest
t - the term or time of the investment
n - the number of conversion period
for the whole term
What rate compounded quarterly is
1
equivalent to simple interest rate of 7 %
2
for 7 years?
𝑛
1 + 𝑟𝑠 𝑡 = 1 + 𝑖

𝑟 28
1 + 0.075 7 = 1 +
4

𝑟 = 6.07%
 1
Ms. Castro plans to invest P100,000 at 12 %
2
simple interest for three years. At what rate
compounded semi-annually could she just as well
invest for the same period of time?

𝑛
1 + 𝑟𝑠 𝑡 = 1 + 𝑖

𝑟 6
1 + 0.125 3 = 1 +
2

𝑟 = 10.9%
If term is 15 months, what rate
compounded quarterly is
equivalent to 12%
a.) simple interest?
b.) compounded semi annually?
𝑎. 𝑟 = 11.34%
𝑏. 𝑟 = 11.83%