Answer to Question #156754 in Financial Math for alv

Question

Suppose that an account offers a nominal interest rate of 10 %,what is the effective interest rate? if the nominal interest rate is the same, but interest is payable monthly, weekly and daily?

Answer 1

nominal interest, $r=10\%$

if compounding was monthly, $m=12$

Effective interest rate $=(1+r/m)^{m}-1=(1+0.1/12)^{12}-1=0.1047= 10.47\%$

if the compounding was weekly, $m=52$

Effective interest rate $=(1+r/m)^{m}-1=(1+0.1/52)^{52}-1=0.1051=10.51\%$

if the compounding was daily, $m=365$

Effective interest rate $=(1+r/m)^{m}-1=(1+0.1/365)^{365}-1=0.1052=10.52\%$