Case 1

If compounding is done annually $1,100.00

Interest earned $100.00

Case 2
If compounding is done montly $1,104.71
Interest earned $104.71

So in the second case effective interest is 104.71 not 100

So effective annual rate (if compunding is done monthly $10.47 percent
Short cut formula to calculate the same
Case 1 i 10%
PV 1000
no of yeara 1

FV $1,100.00
interest $100.00

Case 2
i 10%/12 Case 3 i
PV 1000 PV
no of periods 1*12 no of periods

fv $1,104.71 fv
interest $104.71 interest

effective interest rate $10.47 percent effective

short cut formula 0.10471306744 short cut formula
10%/4
1000
1*4

$1,103.81
$103.81

10.381289
0.1038129
 0 1 2 3 year principal installment interest principal rep
1000 -402 -402 -402 loan 0 1000 402 100
1 402
I 10% 2 402
3
balance of principal remaining