**EXAMPLE 2-A.2**

The Premier Rank 1 offers to 10 percent interest on a deposit of one year. Assuming (i) annual, (ii) half-yearly and (iii) quarterly frequency of interest compute the effective rates of interests in the three alternatives.

**Solution **Assuming a deposit of Rs 1.000. the computation of the effective rates of interest is shown below.

We can determine the effective rate given the nominal rate and vice-versa. Denoting the nominal rate of interest compounded/convertible PTHLY (where P represents the frequency of payments during the year such as 12 for monthly payment. 4 for quarterly payment and two for half-yearly payment) as i” and the corresponding effective rate of interest as i, symbolically

**EXAMPLE 2-A.3**

Assuming [a) i = 0.0125 and (b) i” = 0.1025, find the values of (1) i” and (2) i12”.

**Solution**

Similar to the relationship between the nominal and effective rates of interest, the mathematical relationship between effective and nominal rates of discount is given by Equations 2.A.4 and 2-A.5. The nominal rates or interest and discount rate employed in computing the present value or annuities payable P-thly.

**EXAMPLE 2-A.4**

Assuming d12 = 0.12 and (i)2 = 0.12 find the value of (a) d and (b) d”

**Solution**

The relationship between various nominal and effective rates of interest and discount is given in Table A.5

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