Prob. TV4, Nominal and Effective Interest Rates, API
Find the effective interest rate (API) of an advertized 18% compounded
The 18% compounded monthly means that the rate per month is 18/12, or 1.5% per
month (0.015). To calculate the API use the compound interest model as follows:
solution in APL workspace TV2
- The amount compounded is 1 + the rate for the period, i.e. 1.015
- This amount is compounded for the number of periods for a year, i.e. 12.
- The compounded amount is: 1.01512, i.e. 1.015 raised to the power 12. = 1.195618171
- To find the effective API subtract the 1 added above: = 0.195618171.
The API is 19.56%
End to date, ams 990925