Savings institutions often state a nominal rate which can be thought of as a simple...
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Savings institutions often state a nominal rate which can be thought of as a simple annual interest rate and the effective interest rate which is the actual interest rate earned due to compounding Given the nominal rate it is easy to calculate the effective interest rate as follows Assume that 1 is invested in an account paying an interest rate of 6 compounded monthly n 12 Using the compound interest formula A P 1 r m 0 06 12 1 0617 So the effective interest rate is 1 0617 1 0 0617 or 6 17 Find the effective interest rate for the investments with a nominal yield of 10 compounded daily The effective annual yield is Round to two decimal places as needed with P 1 r 0 06 m 12 and n 12 A 1
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