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Interest rates

  1. Mar 24, 2009 #1
    Find the effective yield on a discount loan with the given discount rate r and the time. (Round your answer to two decimal places.)

    r = 2.7%, 11 months

    I tried using the equation r=(1+i/t)^t, but could not come up with the exact correct answer. I know the answer should be about 2.8 or 2.9. Is this the correct equation? I'm not exactly sure how the discount loan part plays into this. Thanks.
     
  2. jcsd
  3. Mar 25, 2009 #2
    if by effective yield, you mean the annualized equivalent yield, then 1.027^12/11 or about 2.95%. In words, "if I can earn 2.7% over the 11 month period, I wonder what I could earn in the same investment for an additional month, assuming the investment provider gives me the same periodic rate ?"

    The equation assumes that the 2.7% is the effective rate. If it's the nominal rate, then the effective rate over the 11 months is (1+r/11)^11, 2.73% and the annualized equivalent is 1.0273^12/11 or 2.99%
     
    Last edited: Mar 25, 2009
  4. Mar 25, 2009 #3
    Thanks for the help
     
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