Originally Posted by
hooke Thanks, does simply multiplying the daily rate with 365 take into consideration the effects of compounding interest?
No. The resulting .374633 (or ~37.5%) is the annual rate compounded daily
(same as a car loan quoted as 12% compounded monthly; results in 12.6825% effective).
The actual effective annual rate is .454552, or ~45.5% : as per Spring Fan's post.
My point earlier was that the "lender" will declare 12% annual cpd. monthly,
not 12.6825%...looks cheaper to the borrower!
But I should have kept my trap shut and "stick to the facts"! (as SpringFan did).
This is what it all looks like:
Code:
DAY INTEREST BALANCE
000 950.0000
001 .9751 950.9751
002 .9760 951.9511
...
049 1.0243 998.9747
050 1.0253 1000.0000 : BINGO!
051 1.2639 1001.2639
...
364 1.4150 1380.0530
365 1.4165 1381.4695
365.25 .3543 1381.8238 **
** 1381.8238 / 950 = 1.454552, hence ~45.46% effective.