Interest rate conversions

Finance Mode

 

The interest rates can be describe in two different ways :


Three keys are involved in interest conversion application : 'P/YR', ' Nom%', 'Eff%'. The last two can be found in Finance mode, Fn1.


If you know an annual nominal interest rate and you wish to solve for the corresponding annual effective rate:


  1. Enter the effective rate and press 'Eff%'.
  2. Enter the number of compounding periods and press 'P/YR'.
  3. Calculate the nominal rate by pressing 'Nom%'.


Interest conversions are used for two type of problems:


Investments with different compounding periods.


You are considering opening a saving account in one of the three banks. Witch bank has the most favorable interest rate?


First Bank       :  6.70 % annual interest, compounded quarterly.

Second Bank : 6.65 % annual interest, compounded monthly.

Third Bank      : 6.63 % annual interest, compounded 360 times per year.


First Bank :


Keystrokes

Display


6.7 Nom%

6.7

Store nominal rate

4 P/YR

4

Store quarterly

Eff%

6.87

Stores the periodic interest rate.


Second Bank :


Keystrokes

Display


6.65 Nom%

6.65

Store nominal rate

12 P/YR

12

Store quarterly

Eff%

6.86

Stores the periodic interest rate.


Third Bank :


Keystrokes

Display


6.63 Nom%

6.63

Store nominal rate

360 P/YR

360

Store quarterly

Eff%

6.85

Stores the periodic interest rate.



Compounding and payments periods differ.


The TVM solver assume that compounding periods and payments periods are the same. If it not the case, you have to adjust the interest rate to match the payment period before solving the problem.


  1. Enter the nominal rate and press 'Nom%', enter the number of compounding periods in a year and press 'P/YR'. Solve for the effective rate by pressing 'Eff%'.
  2. Enter the number of payments in a year and press 'P/YR'. Solve the adjusted nominal rate by pressing 'Nom%'.


Example : You make a monthly deposit of $ 500 to an account paying 4.56 % interest compound annually. What will be the balance in 12 years.


Keystrokes

Display


4.56 Eff%

4.56

Store nominal rate

12 P/YR

12

Store quarterly

Nom%

4.46

Stores the periodic interest rate.



The result is : $ 95343.58.




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