ECONOMICS
COMPOUND INTEREST
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Find the j first, then find the nominal rate
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Find the n first then find the nominal rate
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Find the n first, then the j and lastly find the nominal rate
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All of the above
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Detailed explanation-1: -Compound interest is calculated by multiplying the initial principal amount by one plus the annual interest rate raised to the number of compound periods minus one. The total initial amount of the loan is then subtracted from the resulting value.
Detailed explanation-2: -In this case, the nominal annual interest rate is 10%, and the effective annual interest rate is also 10%. However, if compounding is more frequent than once per year, then the effective interest rate will be greater than 10%. The more often compounding occurs, the higher the effective interest rate.
Detailed explanation-3: -Compounding interest more than once a year is called “intra-year compounding". Interest may be compounded on a semi-annual, quarterly, monthly, daily, or even continuous basis. When interest is compounded more than once a year, this affects both future and present-value calculations.
Detailed explanation-4: -The rate of compound interest is commonly expressed as a nominal rate of interest. For example in 10% compounded quarterly, 10% refers to the nominal rate of interest. To calculate the nominal rate of interest, simply multiply the rate of interest per period by the number of periods per year.