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Interest Rate Conversions
The interest conversion (ICNV) menu converts between nominal and effective interest rates. To compare investments with different compounding periods, their nominal interest rates are converted to effective interest rates. This allows you, for example, to compare a savings account that pays interest quarterly with a bond that pays interest semiannually.
!The nominal rate is the stated annual interest rate compounded periodically, such as 18% per year compounded monthly.
!The effective rate is the rate that, compounded only once (that is, annually), would produce the same final value as the nominal rate. A nominal annual rate of 18% compounded monthly equals an effective annual rate of 19.56%.
When the compounding period for a given nominal rate is one year, then that nominal annual rate is the same as its effective annual rate.
84 6: Interest Rate Conversions
File name : | Print data : 2003/7/11 |