Effective vs nominal rates, Financial Accounting

Assignment Help:

In the above illustration we have consider how the future value modify along with the modification in frequency of compounding. So as to understand the relationship among effectual and nominal rate let us compute the future value of Rs.1000 on the interest rate of 12 percent while the compounding is done yearly, quarterly, monthly and semiannually.

FV = 1,000(1 + .12)1

= 1120

FV = 1000 ( 1 + .12/2)2

= 1000(1.06)2

= 1000 (1.1236)

= 1123.6

FV = 1000 ( 1 + .12/4)4

1000 = (1.03)4

1000 = (1.1255)

= 1125.5

FV = 1000 ( 1 + .12/12)12

= 1000 (1.01)12

= 1000 (1.1268)

= 1126.8

BY the above computations we can notice that Rs.1000 grows to Rs.1120, Rs.1123.6 and Rs.1125.5 and Rs.1126.8 though the time period and rate of interest are similar. In the given case 12.36, 12.55 and 12.68 are termed as effectual rate of interest.  The connection among the effectual and nominal rate of interest is specified by:

r = (1 + k/m)m - 1    .........................Eq(4)

Here  r = effective rate of interest;

k = nominal rate of interest;

 m = frequency of compounding yearly

depands on the above stated illustration the effective interest rate is computed as follows:

1)      Effective interest rate for monthly compounding

r = (1 + .12/12)12 - 1

= (1.01)12 -1

= 1.1268 - 1

= 12.68

2) Effective interest rate for quarterly compounding

r = (1 + .12/4)4 - 1

= (1.03)4 - 1

= 1.1255 - 1

= .1255

= 12.55%

3) As the same the effective interest rate for semi-annual compounding is

r = (1 + 12/2)2 - 1

= (1.06)2 - 1

= 1.1236 - 1

= .1236

 = 12.36


Related Discussions:- Effective vs nominal rates

Partnership, Definition: A partnership is defined as “the relationship ...

Definition: A partnership is defined as “the relationship that subsists between two or more persons carrying on a business in common with a view to making a profit.” (Partnersh

Hedge and a cash flow hedge, PC Bank has $100,000 in fixed rate loans payin...

PC Bank has $100,000 in fixed rate loans paying an annual interest rate of 10 percent, payable semiannually. PC Bank also has $100,000 in certificates of deposit. Their depositor

Carriage inwards, difference between carriage inwards and carriage out ward...

difference between carriage inwards and carriage out wards

accounting, what organizations are responsible for governing financial rep...

what organizations are responsible for governing financial reporting? what is the role of each organiztion? how have the roles changed in the last 20 years? how might their roles c

Factoring and invoice discounting, The cash flow as well as other benefits ...

The cash flow as well as other benefits of factoring was discussed earlier. Invoice discounting as well offers cash flow advantages. Here selected invoices of superior quality are

What is taxation and capital allowances, Q. What is Taxation and capital al...

Q. What is Taxation and capital allowances? The suppositions made regarding taxation should be investigated. The tax rate has-been supposed to be constant when there may be dif

What are some examples of co branded foods?, What are some examples of co b...

What are some examples of co branded foods? is cool ranch doritos one?

The paper Contemporary Issues in International Accounting, Requirements: P...

Requirements: Part I Access the IFRS and the Generally Accepted Accounting Principles (GAAP) of your country. a. Note ten differences between the two sets of GAAP. Part II Ac

I want to be expert in this side, Hi, I want to join expert mind as an acco...

Hi, I want to join expert mind as an accounting and financial expert and earn some money herein, can you please let me know the procedure and other requirements. Rahul Jhunjhunwal

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd