Asked by Sofia Mateeva on Jun 13, 2024
Verified
A semiannually compounded nominal rate and a monthly compounded nominal rate have the same effective rate. Which has the larger nominal rate? Explain.
Monthly Compounded
Refers to the process of adding interest to the principal sum of a loan or deposit, recalculated on a monthly basis. This is a repeat of Compounded Monthly with a new definition focusing on recalculating interest increase.
- Determine the equivalent interest rates across different compounding frequencies.
- Evaluate the implications of changing the frequency of compounding on the effective interest rate.
Verified Answer
AR
alexis reamsJun 15, 2024
Final Answer :
At the same nominal interest rate, a semiannually compounded rate has a lower effective rate than a monthly compounded rate. To have the same effective rate, the semiannually compounded rate must have a larger nominal rate than the monthly compounded rate.
Learning Objectives
- Determine the equivalent interest rates across different compounding frequencies.
- Evaluate the implications of changing the frequency of compounding on the effective interest rate.