When do we need to change the APR to the Effective f period Interest rates?

[wholegrain]

When I apply the formula I get: (1+0.04/4)^(4/1) -1 = 0.004.

 

 

Like I don't even know when we need to change the APR to the EFR

 

I usually just divide the interest rate and multiply the exponent by the same value

[imatfaal]

OK - there is more than one formula, so you gotta be specific. I am guessing you mean

 

[latex]k = \left(1+ \frac{QR}{m}\right) ^{m/f} -1[/latex]

 

QR = 4% = .04

m = 4

f = 1

 

by f=1 you have made the subperiod equal to the quoted period - so you are in effect calculating the effective rate for the quoted period.

 

[latex]k = \left(1+ \frac{.04}{4}\right) ^{4/1} -1[/latex]

 

[latex]k = \left(1.01\right) ^{4/1} -1 = .0406[/latex]

 

Which is exactly what I would expect it to be. 4% interest compounded quarterly is equivalent to 4.06% interest on an annual basis. So apart from your miscalculation .004 rather than .0406 I am not sure what your problem is

[wholegrain]

ahhhhhhh thanks a lot so they used 0.04 because 0.04 is pretty much the same as 0.046

also, how do we know that the interest rate given is APR or EAR or EFR?

 

Actually, my question was why it is 0.01 instead of 0.046

 

shouldn't k (k = 0.01) be 0.046 since we calculated k with the effective interest rate formula?

Edited January 26, 2014 by wholegrain

[imatfaal]

ahhhhhhh thanks a lot so they used 0.04 because 0.04 is pretty much the same as 0.046

also, how do we know that the interest rate given is APR or EAR or EFR?

 

Actually, my question was why it is 0.01 instead of 0.046

 

shouldn't k (k = 0.01) be 0.046 since we calculated k with the effective interest rate formula?

 

Hey there Wholegrain - you are really gonna have to be more careful with those zeroes thats the second time - it is 0.0406 not 0.046 ;-)

 

And No when it comes to paying a mortgage .04 really is not the same as .0406 - this becomes much more marked when there are more compounding intervals.

 

All the Acronyms have changed or are new since I did any of this so I cannot help you out on the APR/EAR/EFR

 

why what is 0.01? If you mean the figure in the last line of my sums 1.01^4 then thats the same as in your last line. Four percent a year compounded quarterly.

 

k is the effective rate for the subperiod - in the case you gave the subperiod and the period are the same

[wholegrain]

thanks for the reply

 

i thought it was 0.01 for some reason. probably because i divided the effective rate by 4 again. i forgot what i was thinking.

 

can we use the effective rate and substitute with the k we find in financial formulas?

Edited February 5, 2014 by wholegrain

[imatfaal]

To be honest I don't know - but then I haven't even looked at any of this since an aborted economics degree about the same time the Berlin Wall fell. In my opinion always go back to the maths; if your maths is correct you just need to be able to manipulate algebraically and you are sorted