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A Teaching Note on the Effective Interest Rate, Periodic Interest Rate and Compounding Frequency

In: Advances In Quantitative Analysis Of Finance And Accounting New Series

Author

Listed:
  • Youngsik Kwak

    (Department of Accounting and Finance, School of Management Dover, Delaware 19901, USA)

  • H. James Williams

    (School of Business, North Carolina Central University, Durham, North Carolina 27707, USA)

Abstract

Students often experience problems in solving time-value-of-money problems — primarily because they do not know which interest rate to use from among the nominal, effective, and periodic rates. In this paper we show the relationships among different interest rates and clarify the use of these rates in the time-value-of money problems. In particular, we show how to calculate the periodic rate, given the nominal rate, because students must use the periodic rate when they use either the “formula” or “financial calculator” method to compute the interest rate.

Suggested Citation

  • Youngsik Kwak & H. James Williams, 2005. "A Teaching Note on the Effective Interest Rate, Periodic Interest Rate and Compounding Frequency," World Scientific Book Chapters, in: Cheng-Few Lee (ed.), Advances In Quantitative Analysis Of Finance And Accounting New Series, chapter 4, pages 65-72, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812701213_0004
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