Question

What nominal rate, compounded daily, is equivalent to 3.4% compounded monthly?

Answer 1

Effective rate for monthly compounding of 3.4% is calculated using the formula ((1+r/n)^(n*t))-1, where r is nominal interest rate, n is number of times compounding per period, t is number of periods.

On substituting, we get ((1+3.4%/12)^(12*1))-1

= (1.002833^12)-1

= 3.4535%

Now, For daily compounding, we have to find the annual nominal rate which will give the effective interest rate of 3.4535%. It is also calculated using the formula, ((1+r/n)^(n*t))-1. For daily compounding, n is 365.

So, 3.4535%= ((1+r/365)^(365*1))-1

1.034535= (1+r/365)^365

r= 3.395%

So, nominal rate of 3.395% compounded daily is equivalent to 3.4% compounded monthly.