Question
What are the stated rates that correspond to an effective annual rate of 10 percent given the compounding frequencies below? Effective Annual Rate Stated Annual
What are the stated rates that correspond to an effective annual rate of 10 percent given the compounding frequencies below?
Effective Annual Rate Stated Annual Rate Compounding Frequency
.10 ? 2
.10 ? 12
.10 ? 52
In general, if the effective annual rate is re, and the stated rate is rs, compounded t times per year, then then the periodic rate is (rs/t) and the effective annual rate is
(1 + (rs/t) )t - 1 = re (*)
To find rs given re and t, solve equation (*) for rs. That is (1+(rs/t) )t = 1+re => (1 + rs/t) = (1 + re)(1/t) => rs/t = (1 +re)(1/t) -1 => rs = t [(1 + re)(1/t) 1].
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