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- Posts
What is the effective annual rate of interest of 2.1% compounded every three
months?A 6.43%
B 8.40%
C 8.67%
D 10.87%
shouldn’t i do this ? r = (1 + i/n)n –1(1+2.1/4)^4 – 1= 4.4 %
i don’t get it why they solve it like that
[(1.021)4 – 1] × 100 = 8.67%2.1% is the same as 0.021 and you should be taking (1 + 0.021)^4 – 1 = 0.0867 or 8.67%.
I do explain this in my free lectures on interest. The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
thank you sir
but then when should i use this r = (1 + i/n)n –1 by divided the interest by the period per year
i did watch them i am watching them again , but i got confuse with kaplan study text see this example …The nominal interest rate is 10% per year compounded on a monthly
basis.
Required
A company is going to invest for 12 months what is the effective
interest rate?
Solution
r = (1 + i/n)n –1
r = (1 + 0.1/12)12 – 1
r = 0.1047
The effective interest rate of receiving 10% interest per annum
compounded on a monthly basis for 12 months is the same as
receiving 10.47% interest per annum with no compoundingIn the example in your first post it did not say that the 2.1% was the annual interest, So it must be the interest every 3 months.
In the example in your latest post the interest is given at 10% per year and therefore we need to divide by 12 in order to get the monthly rate.
(If the first example had given the annual interest then we would have divided by 4 to get the interest every three months)
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