Engineering Economics

Types of Interest Rates

MPS Department | FEU Institute of Techonology
 OBJECTIVES

• Determine what are the different types of interest rate

• To compute different types of interest
Types of Interest Rates
1.) Interest Rate ( i )– is the rate per period.

2.) Nominal Rate ( j )– is the rate of interest per year.

Magic word “Compounded”.

3.) Effective Rate of Interest ( ie )– is the actual and more precise interest
rate per period.
 FORMULAS

Interest Rate and Nominal Rate

i=j/n
i – interest rate
j – nominal rate
n – method of compounding

Effective Rate of Interest (ie)

ie = ( 1 + i )n -1
 SAMPLE PROBLEMS

1.) An interest rate of 7% compounded quarterly is given, compute for the interest rate per period?

2.) A bank pays 1.0% interest on savings account five times a year. Find the effective annual interest rate.

3.) An interest pays 4% interest rate, calculate the nominal rate of interest compounded quarterly?
 HOMEWORK

1.) If a rate of 10% compounded semi-annually, compute for the interest rate.

2.) If an interest rate pays 9% five times a year, calculate the effective rate of interest.

3.) If an effective rate of interest is given 6%, compute for the interest rate if it pays thrice a year.