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Effective Annual Rates

Effective Annual Rates - then the effective rate for cash...

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i NOM = stated or quoted rate i PER = periodic rate = i NOM / m EAR = (1 + i PER ) m - 1.0 If m = 1, then i PER = i NOM = EAR If m > 1, then i PER < i NOM < EAR Make sure that you understand that the time period for the “effective” rate has to match the time period of the cash flows. Let m represent the number of compounding periods in the year, but let n represent the number of compounding periods between cash flows, then i PER = periodic rate = i NOM / m Effective Rate for Cash Flow Period = (1 + i PER ) n - 1.0 If the nominal annual interest rate is 8.0 percent, with quarterly compounding,
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Unformatted text preview: then the effective rate for cash flows received every 3 months to 24 months would be: Timing of Cash Flow Calculation Rate Every 3 Months (1.02) 1- 1.0 2.00% Every 6 Months (1.02) 2- 1.0 4.40% Every 9 Months (1.02) 3- 1.0 6.12% Every 12 Months (1.02) 4- 1.0 8.24% Every 15 Months (1.02) 5- 1.0 10.41% Every 18 Months (1.02) 6- 1.0 12.62% Every 21 Months (1.02) 7- 1.0 14.87% Every 24 Months (1.02) 8- 1.0 17.17%...
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