Interest Conversion

Interest rates are normally expressed as nominal interest rates. A nominal interest rate is an annual rate that is compounded periodically (ie 12% per annum compounded monthly). When investments have different compounding periods (ie monthly vs quarterly) then effective interest rates are used to compare them. (eg 18% pa compounded monthly is equivalent to earning 19.56% pa compounded annually.)

The Interest Conversion form allows you to convert between nominal and effective interest rates using two possible compounding methods:

• Periodic compounding (ie monthly, quarterly, yearly).

• Continuous compounding.

Performing Interest rate calculations

• Enter the known interest rate.

• Tap the button corresponding to the desired rate or

• Tap the spacebar

All values will be updated simultaneously. The Nominal annual rate will be carried back to the TVM form.

Example: Savings account with payment periods different from compounding periods- You make monthly deposits of $45.00 into an account paying 5% compounding daily (365 day basis). How much will you receive after 8 years?

Actions

1. Enter 365 into the Payments per year field

2. Enter 5 into the Nominal annual rate field

3. Press the spacebar (or tap the Effective annual rate button)

4. 5.127 is returned to the Effective annual rate field

5. Enter 12 into the Payments per year field

6. Press the spacebar (or tap the Nominal annual rate button)

7. Tap the TVM button (or issue a Ctrl-T)

8. Enter 8 into the Number of periods field (Period in years)

9. Press the N key (period in months)

10. Enter 0 into the Present value field

11. Enter -45 into the Payment field

12. Tap the Future value button

13. 5300.57 is returned to the Future Value field

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