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Effective Rate Of Interest (for investing)

Effective Rate Of Interest (for investing). Because interest rates are applied in different ways, comparing them can be misleading. A flat rate of 5% p.a. cannot be compared to a rate of 6% compounding monthly.

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Effective Rate Of Interest (for investing)

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  1. Effective Rate Of Interest (for investing)

  2. Because interest rates are applied in different ways, comparing them can be misleading. • A flat rate of 5% p.a. cannot be compared to a rate of 6% compounding monthly. • We need to convert the rates to an annualised rate – that is the equivalent rate if it was compounding once per year.

  3. Converting a Compound / Nominal Rate • If a rate is compounding (also referred to as nominal) we can use the Graphic calculator to find the effective rate. • You need to be able to have the nominal rate and the number of compounding periods per year.

  4. Use Graphic Calculator • Go to TVM • F5 – Conversions • Enter: • N = 12 • I% = 4 • Then push F1 and the effective rate is displayed – 4.07%

  5. Simple Interest to Effective Rate • You need the time and the flat rate of interest • Find the interest earnt • The using the GC use the compound interest section and find I • Follow example from board

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