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florryb says

For example 2. How did we arrive at 10 days and 25 days. it’s nowhere in the question

florryb says

For example 2, was 25 days and 10 days assumed. It’s nowhere in the question

asher2019 says

Thanks Mr Mofatt for this lecture. Your explanation is always in place.

afuakay says

Hello,

I am a bit confused her with the first example.

From what I know, effective interest rate (R)= [(1+ i/n)^n] -1

My question is why didn’t you divide 0.04167 by 6 in the bracket? Any reason for that?

Here is what i mean

R= [(1+0.04167/6)^6] -1

John Moffat says

Why would be divide by 6??

The interest of 4.167% over 2 months. There are 6 periods of 2 months in a year and so if it was not for the fact that the interest was compounded, then the yearly interest would be

6 x 4.167%. Because it is compounded it is as I show in the lecture: (1.04167^6) – 1.

If you are still unsure about compounding then do watch the Paper MA lectures on interest, because this is revision from Paper MA (was F3).

avenu507 says

I agree with your approach and it makes sense, (I have watched the lecture from MA).

But why than your formula reveals the different results comparing to usual EAR formula: (R)= [(1+ i/n)^n] -1 ?

This formula is used everywhere, even in Excel by using the internal formula “Effect” for EAR I got 25,44% instead of your’s 27.7559%.

In Excel I used: =(EFFECT(0.04167,6)*6+1)*100 (for mine calculations with EAR formula) and =100*POWER(1.04167,6) – for yours.

thank you

joelsasi says

As per my understanding the formula is correct, but 4.167% over two months only not for per annum, therefore there is no need to divide by n as it is not given as annual interest rate.is this make sense?

unfazed says

we added 1 to the yearly rate in example 1 to get 1.04167 thats fine, but in the next question the yearly rate is 1.0101, when we add 1 to it it should be 2.0101 but you didnt add 1, may i ask why

John Moffat says

If, for example, the monthly percentage was 1%, then adding on 1% each month is the same as multiplying by 1.01 each month – try it yourself with some made up numbers.

If you are still unsure that watch the Paper MA (was F2) lectures on interest.

cm1985 says

Kindly help me to understand where $100 is coming from.

John Moffat says

You could use any figure, but because they are %’s it is easiest to use $100. For every $100 that they invoice, $4 is discount.

Use X’s if you prefer!!

cm1985 says

Thank you very much.

faizankhan23 says

Why do we add 1 to the percentage while calculating the annual cost