Nominal and effective rates
General · Mathematics
Study notes
Q: Nominal 12% compounded monthly vs quarterly. Find effective rates. Monthly: (1+0.12/12)¹²-1 = (1.01)¹²-1 ≈ 0.1268 = 12.68%. Quarterly: (1+0.03)⁴-1 = 1.1255-1 = 12.55%. Monthly better (more frequent!)! Continuous: e^0.12-1 ≈ 12.75%. (APY > APR always!)