Nominal and Effective Interest Rates (Grade 11 NSC Matric Mathematics): Flashcards
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Define nominal interest rate
Define nominal interest rate
Rate compounded >1/year; stated rate, not true annual growth
Define effective interest rate
Define effective interest rate
Actual annual rate after compounding; real % increase per year
When is effective rate > nominal rate?
When is effective rate > nominal rate?
Always, when compounding is more frequent than once per year
Why is effective rate higher than nominal?
Why is effective rate higher than nominal?
You earn interest on interest more often with frequent compounding
Formula to convert nominal to effective rate
Formula to convert nominal to effective rate
What does represent in the conversion formula?
What does represent in the conversion formula?
Number of compounding periods per year
How to compare different interest rates?
How to compare different interest rates?
Always convert to effective rates first before comparing
Effect of more frequent compounding on accumulated amount
Effect of more frequent compounding on accumulated amount
Leads to higher accumulated amounts
Which effective rate to choose when borrowing?
Which effective rate to choose when borrowing?
Choose the option with the lower effective rate
Which effective rate to choose when investing?
Which effective rate to choose when investing?
Choose the option with the higher effective rate