A17 Nominal Annual Rates of Interest

Question 1

what is i^m/m mean?

Answer 1

effective rate of interest per m-th of a year

or

the effective interest rate for 1/m-th of a year

Question 1

what does i^m mean?

Answer 1

NAR convertible (or compounded) m times per year

Question 2

what is the annual accumulation factor?

Answer 2

(1 + (i^m/m))^m

Question 3

what is the general formula for when given i^m, what is the equivlaent annual effective rate of interest, i?

Answer 3

i^m = m[(1 + i)^1/m - 1]

Question 4

what is the relationship b/w i^m and i^n?

Answer 4

i^n = n[(1+(i^m)/m)^(m/n) - 1]

Question 5

can you calculate directly using a nominal rate?

Answer 5

No. You must first convert it to an effective rate over some period of time. That effective rate is wha is used to accumualte/discount cashflows.