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SAMPLE PROBLEM ON NOMINAL & 𝑟𝑚 = [(1.025)3 − 1] (12)

EFFECTIVE RATES
𝑟𝑚 = 0.09918
A bank pays one percent interest on
savings accounts four times a year. How
𝑟𝑚 = 9.918%
much is the effective annual interest?

Given:
Find the present worth of a future payment
r = 1%
of 100,000 to be made in 10 years with an
m=4
interest of 12% compounded quarterly.
Solution:
Given:
𝑟 𝑚
𝐸𝑅 = [1 + ] −1 F = 100,000
𝑚
t = 10 yrs.
0.01 4 m=4
𝐸𝑅 = [1 + ] −1 r = 12%
4

𝐸𝑅 = [1 + 0.0025]4 − 1 Required: P

𝐹
𝐸𝑅 = 1.004% 𝑃=
(1 + 𝑖)𝑛

𝑟 0.12
If a certain amount is earning interest 10% 𝑖= = = 0.03
compounded quarterly. What is the 𝑚 4
equivalent nominal rate compounded
𝑛 = 𝑡𝑚 = 10(4) = 40
monthly?
100,000
rm = ? mm = 12 𝑃=
(1 + 0.03)40
rq = 10 mq = 4
𝑃 = 30,655.88
ERm=ERq

𝑚
𝑟𝑚 𝑚 𝑟𝑞
[1 + ] − 1 = [1 + ] −1
𝑚𝑚 𝑚𝑞

𝑟𝑚 12 0.10 4
[1 + ] = [1 + ]
12 4

𝑟𝑚 12
[1 + ] = [1.025]4
12

𝑟𝑚 12 4
[1 + ] = [1.025]12
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