From the question r nominal interest rate 5 m number of compounding periods 12

# From the question r nominal interest rate 5 m number

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From the question: r = nominal interest rate = 5% m = number of compounding periods = 12 (compounded monthly) i = effective interest rate = 5% / 12 = 0.41% per month 4 IE 492 Engineering Economics Karnik

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INTEREST PERIODS AND PAYMENT PERIODS There can be three types of situations related to interest periods and payments periods. Each of these situations requires a different approach. 5 Situation Meaning Approach Interest periods coincide with payment period Number of compounding periods equal payment periods Direct use of compound interest formulas is possible (formulas from chapter 2) Interest periods are smaller than payment periods Number of compounding periods is higher than payment periods Determine effective interest rate for each compounding period and treat each payment separately Interest periods are larger than payment periods Number of compounding periods is lower than payment periods See next slides for detailed approach IE 492 Engineering Economics Karnik
INTEREST PERIODS COINCIDE WITH PAYMENT PERIOD When interest payments coincide with the payment periods the compound interest formula we saw earlier can be used, but with a small change described below. Example: Consider interest rate factor (F/P,i%,n) where n is the number of years or investment period or payment period. However we will make the following amendment to the interest rate factor to indicate both interest period and the payment period. (F/P,i%,n) will become (F/P,i%,m*n).

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