VoyForums
[ Show ]
Support VoyForums
[ Shrink ]
VoyForums Announcement: Programming and providing support for this service has been a labor of love since 1997. We are one of the few services online who values our users' privacy, and have never sold your information. We have even fought hard to defend your privacy in legal cases; however, we've done it with almost no financial support -- paying out of pocket to continue providing the service. Due to the issues imposed on us by advertisers, we also stopped hosting most ads on the forums many years ago. We hope you appreciate our efforts.

Show your support by donating any amount. (Note: We are still technically a for-profit company, so your contribution is not tax-deductible.) PayPal Acct: Feedback:

Donate to VoyForums (PayPal):

[ Login ] [ Contact Forum Admin ] [ Main index ] [ Post a new message ] [ Search | Check update time | Archives: 1, [2] ]

[ Next Thread | Previous Thread | Next Message | Previous Message ]

Date Posted: 18:45:30 09/30/01 Sun
Author: Dr. D.
Subject: Re: Effective Rate vs. Nominal Rate
In reply to: Kymberly 's message, "Effective Rate vs. Nominal Rate" on 16:40:00 09/30/01 Sun

The general rule is that the rate must match the payment interval.

For example - assume you were investing $100 each year in an account that paid a a 10% nominal rate with semi-annual compounding. Each payment would grow by 10.25% by the time the next payment was made. So, in this case, you would use the effective rate of 10.25%, since that's the actual rate of interest over the period in question (There's no way to adjust the payment to a semi-annual payment, so you must adjust the rate to an annual one).

To build on the previous example, assume you had a 16% annual rate of interest with quarterly compounding, but made payments semi-annually. IN this case, the payment interval is 6 months. The rate over 6 months is actually [(1.04) squared - 1] = 8.16% (i.e. between each payment, you receive 4% per period for two periods). In this case, it's exactly like an annual payment annuity with an 8% nominal rate with semiannual compounding.

Hope this helps.


>How do you know when to use the effective rate and
>when to use the nominal rate?

[ Next Thread | Previous Thread | Next Message | Previous Message ]
[ Contact Forum Admin ]

Forum timezone: GMT-8
VF Version: 3.00b, ConfDB:
Before posting please read our privacy policy.
VoyForums(tm) is a Free Service from Voyager Info-Systems.
Copyright © 1998-2019 Voyager Info-Systems. All Rights Reserved.