5 For an interest rate compounded annually of 7 what is the

5. For an interest rate compounded annually of 7%, what is the equivalent interest rate compounded: 1. Semi-annually 2. Quarterly 3. Monthly 4. Weekly 5. Daily

Solution

Equivalent interest rate can be calculated as

(1+(r/n))ⁿ -1

Where

r - annual interest rate

n - no.of compounding periods

equivalent interest rate compounded:

1. Semi-annually

(1+(.07/2))² -1 = 1.035² - 1 = 1.071225-1 = 7.1225%

2. Quarterly

(1+(.07/4)⁴ -1 = 1.0175⁴ - 1 = 1.071859-1 = 7.1859%

3. Monthly

(1+(.07/12)¹²-1 = 1.00583¹² - 1 = 1.072247-1 = 7.2247%

4. Weekly

(1+(.07/52)⁵²-1 = 1.00135⁵² - 1 = 1.072672-1 = 7.2672%

5. Daily

(1+(.07/365)³⁶⁵-1 = 1.000192³⁶⁵ - 1 = 1.072587-1 = 7.2587%