The true annual rate once compounding is included. CAPS Grade 12 definition, worked NSC example and related financial maths practice.
The true annual rate once compounding is included.
The effective annual rate is the equivalent rate if interest were compounded once per year. It is calculated from the nominal rate using 1 + i_eff = (1 + i_nom/m)^m, where m is the number of compounding periods per year.
12% p.a. compounded monthly gives i_eff = (1 + 0,12/12)¹² − 1 ≈ 12,68%.
Paper 1 asks you to convert between nominal and effective rates, or to compare investments with different compounding periods.
Forgetting to subtract 1, which gives an answer above 100%.
The effective annual rate is the equivalent rate if interest were compounded once per year. It is calculated from the nominal rate using 1 + i_eff = (1 + i_nom/m)^m, where m is the number of compounding periods per year.
Effective interest rate belongs to the Financial maths section of CAPS Grade 12 Mathematics, which is examined in Paper 1.
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