How Do You Calculate the Nominal Interest Rate Compounded Differently?

[aisha]

how do u do this ? Find the nominal interest rate that is equivalent to 18%/a compounded quarterly, if interest is paid monthly?

WOh confusing What do u do?

 

[relinquished™]

I'm not really sure if your given is 18%/a convertible quarterly or 18% convertible quarterly, however, i can try to help you in both;

The formula used here should be

<br /> (1 + \frac{i^{(4)}}{4})^4 = (1 + \frac{i^{(12)}}{12})^{12}<br />

Whatever it is, you are given i^{(4)}. Solve for i^{(12)}

 

[aisha]

Does this make sense I did all the calculations following an example problem its a little hard to write it out here but I wrote

P(1+0.18/4)^4=P(1+i)^12

and solved for i finding the 12th root of the left side and then subtracting 1

i=0.001478 or 1.478% then to get the nominal rate I multiplied this by 12

so 12*1.478% and got = 17.736%

Therefore 17.736%/a compounded monthly is equivalent to 18%/a compounded quarterly.

IS THIS CORRECT?

 

[aisha]

ANYONE KNOW IF MY PREVIOUS POSTS ANSWER IS CORRECT ANYONE?

 

[gmohamed]

ANYONE KNOW IF MY PREVIOUS POSTS ANSWER IS CORRECT ANYONE?

Hi there:

Read this lecture and you'll know the answer by yourself:

[PPT]Nominal and Effective Interest rates

(Write it on any search engine and then download the link - Good luck.

Feel free to send back if you cannot get it.

 

[gmohamed]

Hi there:

To complete my answer after viewing the lecture I sent you with other references, yes, your answer is correct.

The formula you need to use here is as follows:

(1 + 18%/4)^4 = (1 + i/12)^12

Only i is unknown and you need to figure it out as follows:
Just do simple math, and re-write terms, then, you will find the following answer:

i = 0.1773655395684

You can also reach to the same answer by simply using the equivalent interest rate calculator.

Good luck :)