# Effective interest rate

• Mar 23rd 2010, 12:57 PM
diehardmath4
Effective interest rate
Nominal rate and compounding frequency Effective rate (%)
? compounded monthly 10.5

what i did was

i = j/m > 0.105 = j / 12 which = 1.26

f = ( 1 + i ) ^ m F = ( 1 + 0.0126 ) ^ 12 - 1 = 16.21%

the book is giving the answer of 10.03% (Wondering)
• Mar 23rd 2010, 03:40 PM
Wilmer
Quote:

Originally Posted by diehardmath4
Nominal i = j/m > 0.105 = j / 12 which = 1.26

Huh? .105 / 12 = .00875

1.00875^12 - 1 = .1102... so ~11.02%
• Mar 24th 2010, 07:32 AM
diehardmath4
Given: f = 10.5% = 0.105 Find i and j, m = 12

i = (1 + f)^(1/m) - 1

i = (1 + 0.105)^(1/12) - 1 = 0.00836 = 0.836%

i = j/m => j = mi = 12(0.836%) = 10.03% compounded monthly
• Mar 24th 2010, 10:51 AM
Wilmer
Quote:

Originally Posted by diehardmath4
Given: f = 10.5% = 0.105 Find i and j, m = 12

Is that so?! Your 1st post said:
"Nominal rate and compounding frequency Effective rate (%)
? compounded monthly 10.5"

That sure seems to say 10.5 is compounding.

BUT IF you're looking for the rate that results in 10.5%
AFTER compounding, then 10.03% is correct.