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84 6: Interest Rate Conversions
File name : English-M02-1-040308(Print).doc Print data : 2004/3/9
6
Interest Rate Conversions
The interest conversion (ICNV) menu converts between nominal and
effective interest rates. To compare investments with different
compounding periods, their nominal interest rates are converted to
effective interest rates. This allows you, for example, to compare a
savings account that pays interest quarterly with a bond that pays
interest semiannually.
The nominal rate is the stated annual interest rate compounded
periodically, such as 18% per year compounded monthly.
The effective rate is the rate that, compounded only once (that is,
annually), would produce the same final value as the nominal rate. A
nominal annual rate of 18% compounded monthly equals an effective
annual rate of 19.56%.
When the compounding period for a given nominal rate is one year,
then that nominal annual rate is the same as its effective annual rate.