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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!
1. 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 🙂
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