Decoding Interest Rates

Decoding Interest Rates - When only an interest rate per...

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When only an interest rate per time span is given, then the stated rate is the rate per compounding period (i). “12% per year” implies that i = 12% per year and compounding is yearly so r per year = i × m = 12% × 1 = 12% i per year = (1 + 12%/1) 1 – 1 = 12% When an interest rate per time span and a compounding period are given, then the stated interest rate is the nominal rate (r) for that time span. “12% per year compounded monthly” implies that r = 12% per year so i per month = r/m = 12%/12 = 1% i per year = (1.01)
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