Question

Interest Rates are sometimes referred to as:

		Yield
		Future Value
		Compounding rate
		None of these

Answer 1

Interest sometimes referred as :

Compounding Rate.

Explenation: Interest rates are two types

1. Simple Interest Rate (Interest rate is calculated on Original Principal Amount.)

2.Compounding Rate (Interest rate calculated on Principal + Previously earned Interest.)

For Eg, I have Deposited $ 10000 in a bank @ 12 % Quaterly Compounding. We calculate compounding Interest based on the follwing

FV= P0(1+r)^n, FV = Future value, r = Interest Rate, n = No of times interest is to compounded i.e Annualy or Semi Annually, Quaterly or daily.

FV = 10000(1+.12/4)^4

FV = 10000(1.1255)

= 11255

Interest Portion is 1255, i.e Effective rate of Interest is 1255/10000 = 12.55%