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Equivalent Rates

This document discusses equivalent interest rates and provides examples of computing equivalent rates. It defines equivalent rates as two annual rates with different conversion periods that will earn the same maturity value for the same time. Examples show computing the effective rate equivalent to a nominal rate compounded quarterly, and equivalent rates for various nominal rates compounded at different intervals. The document stresses rounding equivalents rates to six decimal places for precision.

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Jerry Mae Ranes
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719 views10 pages

Equivalent Rates

This document discusses equivalent interest rates and provides examples of computing equivalent rates. It defines equivalent rates as two annual rates with different conversion periods that will earn the same maturity value for the same time. Examples show computing the effective rate equivalent to a nominal rate compounded quarterly, and equivalent rates for various nominal rates compounded at different intervals. The document stresses rounding equivalents rates to six decimal places for precision.

Uploaded by

Jerry Mae Ranes
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

EQUIVALENT

RATES

PREPARED BY: MR. JERRY MAE A. RANES


LESSON OUTLINE:
▪ Compute equivalent rates using nominal rate
and/or effective rate of compound interest.
DEFINITION OF TERMS
▪ Equivalent rates – two annual rates with
different conversion periods that will earn the
same maturity value for the same time/term.

▪ Nominal rate – annual interest rate (may be


compounded more than once a year)

▪ Effective rate – rate when compounded


annually will give the same compound each year
with the nominal rate; denoted by 𝑖 1 .
EXAMPLE #1
What effective rate is equivalent to 10% compounded
quarterly?

Answer: Hence, the effective rate equivalent to 10%


compounded quarterly is 10.3813%.
NUMBER OF DECIMAL
PLACES
When solving for an equivalent rate 𝑗,
it is important to make it very precise.
Thus, when solving for an equivalent
rate, six or more decimal places will
be used.
EXAMPLE #2
Complete the table by computing for the rates equivalent
to the following nominal rates. Round off your answer to
six decimal places.

GIVEN INTEREST RATE EQUIVALENT INTEREST RATE

12% compounded monthly ________ compounded annually

8% compounded semi-annually ________ compounded quarterly

12% compounded monthly ________ compounded semi-annually


EXAMPLE #2
Complete the table by computing for the rates equivalent
to the following nominal rates. Round off your answer to
six decimal places.

GIVEN INTEREST RATE EQUIVALENT INTEREST RATE

12% compounded monthly 12.6825% compounded annually

8% compounded semi-annually 7.9216% compounded quarterly

12% compounded monthly 12.304% compounded semi-annually


EXAMPLE #3
What nominal rate compounded monthly is
equivalent to 12% compounded annually? Round off
your answer to six decimal places.

Answer: The nominal rate compounded monthly


equivalent to 12% compounded annually is 11.3868%.
EXAMPLE #4
What simple interest rate is equivalent to 10%
compounded semi-annually at the end of year 1?

Answer: The simple interest rate equivalent to 10%


compounded semi-annually is 10.25%.
THANK YOU!
FOR YOUR ATTENTION

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