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Math Help - effective and nominal rate question

  1. #1
    uwo
    uwo is offline
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    effective and nominal rate question

    Bank A has an effective annual rate of 18%. Bank B has a nominal annual rate of 17%. What is the smallest whole number of times per year that Bank B must compound its interest in order that the rate at Bank B be at least as attractive as that at Bank A on an effective annual basis?

    I have tried using the effective annual to nominal rate equation, equating the two and trying to solve for m but can not seem to get the answer.
    Can someone please help?
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  2. #2
    MHF Contributor
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    Your approach is valid, although it may be difficult to isolate m algebraically.

    1.18 \leq \left( 1+\frac{0.17}{m} \right)^m

    I assume you rearranged that for m and got stuck. You know the answer is an integer so you can just use trial and error to find the smallest value of m that satisfies the inequality.
    Last edited by SpringFan25; October 3rd 2010 at 07:49 AM.
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