You have completed the second section of the course and learned about interest rates.
Let's sum up some of the key points.
- If you know the periodic interest rate (Im), you can find the nominal rate if you multiply it by the number of compounding periods: Jm = Im x m
- If you know the nominal rate (Jm), you can find the periodic rate if you divide it by the number of compounding periods: Im = Jm / m
- If the question is asking you which rate an investor would prefer, you need to first convert all the options to effective rate (j1), and then pick the highest one (because the investor wants to BE RICH)!
- If the question is asking which mortgage rate a borrower would prefer, you do the same and pick the lowest one (the borrower wants to SAVE MONEY)!
- The more frequent the compounding, the higher the effective rate. For example j12=6% is higher than j2=6% (we know this because they are both 6%, if the % are different you need to convert rates to j1 to compare them).
- If you are given different rates with different compounding (for example j2 = 5% and j12 = 4.5%), the only way to see which one is lower (or higher) is to convert them both to j1 using the NPEPN.