Hello Sir,
Probably a basic query, but for some reason I'm getting a bit confused with the 'n' in the effective interest rate formula.
r = 1+(i/n)n - 1
Could you please help me understand the difference between the two and what how do we take the i/n value?
1. 10% interest per year, interest calculated quarterly.
2. 1.2% interest per month.
When we say that n is the number of compounding periods, how do we apply them in the cases above?
Would really really appreciate your help!
Thank you!
Ask the Tutor ACCA MA
Effective annual interest rate
3y ago#11. 10% per year means that they are adding on 10/4 = 2.5% every quarter.
Since there are 4 quarters in a year, the effective yearly rate is 1.025^4 - 1 = 0.1038 or 10.38% per year.
2. Here we already know the period rate, it is 1.2% per month.
Since there are 12 months in a year, the effective yearly rate is 1.012^12 - 1 = 0.1538 or 15.39%
Have you watched my free lectures on this? The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well :-)
Thank you so much sir! I understand now.
Really appreciate your help.
3y ago#3You are welcome :-)
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