Answer to Question #124880 in Financial Math for Nathan Bito

Question

Find the equivalent compound interest rate for a flat rate loan charged at 9.5% p.a., where repayments are to be made quarterly over 2 years. Use trial and error to answer this question

Answer 1

Considering the quarterly compounding, there would be 4 periods of 3 months each for compounding every year.Thus, the total compounding periods= periods * 2 years resulting to 8 compounding periods.

interest rate=interest rate per annum/number of compounding periods

=9.5%/8

=1.1875%

To use trial and error, the interest rate is substituted with a value that may give a value that may give 1.1875 or less.

a) 9.4%/8=1.175%

b)9.6%/8=1.2

Thus the compound interest would be 9.6 % per annum