Question

Convert an interest rate of 2% per quarter compounded monthly into a nominal interest rate over the following time periods:

1. Quarter
2. Year
3. Semiannual
4. Decade

Please include any formulas used. Thanks in advance

Answer 1

Answer :-

We have to use following formula to get nominal interest rate :

Interest rate for one period = nominal rate / No. of compounding periods in one year

Therefore nominal rate = Interest rate for one period × no. of compounding periods in one year

(1) 1 quarter = 1 time compounding So nominal rate

Nominal interest rate = 2% × 1 = 2%

(2) 1 year = 4 times compounding therefore,

nominal rate = 2% × 4 = 8%

(3) semiannually means 6 months = 2 times compounding therefore ,

nominal rate = 2% * 2 = 4%

(4) Decade means 10 years period = 2.5 times compounding. Therefore,

Nominal interest rate = 2%×2.5 = 5%