Question

Problem 2.2 Effective interest rate Given: The nominal interest rate is 7%. You wish to know the difference in the frequency of compounding Find: The effective (annual) interest rate if the nominal interest rate of 7% is compounded (a) quarterly, (b) monthly, (c) weekly, (d) daily, and (e) continuously. Solution

Answer 1

(a)

effective interest rate is=((1+(r/m))^(n*m))-1

=((1+(7%/4))^(1*4))-1

=7.1859% or 7.19%

(b)

effective interest rate is=((1+(r/m))^(n*m))-1

=((1+(7%/12))^(1*12))-1

=7.2290% or 7.23%

(c)

effective interest rate is=((1+(r/m))^(n*m))-1

=((1+(7%/52))^(1*52))-1

=7.2458% or 7.25%

(d)

effective interest rate is=((1+(r/m))^(n*m))-1

=((1+(7%/365))^(1*365))-1

=7.2501% or 7.25%

(e)

effective interest rate is=e^(7%)-1

=EXP(7%)-1

=7.2508% or 7.25%

EXP is excel function

the above is answer..