Hello class, My name is Alexis Ostermann and I am going to be your professor today. Today we will be talking about how to calculate accruing interest and the difference between effective interest rate and nominal interest rate.
For starters an interest rate is the proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.
A Nominal Interest Rate is the interest rate itself.
An Effective Interest rate is how much an investment earns over time.
To calculate the effective rate is calculated in the following way, where R is the effective annual rate, I the nominal rate, and N the number of compounding periods per year
ex: N
R= (1+ I )
( N )
R= effective interest rate
I= Interest rate stated
N= Number of compound periods
So now I will give you an example question for you to answer. Use this formula to find the answer
Determine the Effective interest rate on 7% year interest compounded monthly
ANSWER:
12
(1+0.07) = 1.07
12
Thank you for letting me teach you about interest rates I hope you enjoyed my lecture
This is very helpful alexis, you do a good job of breaking down each variable and setting up the problem.
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