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:
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.
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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