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Chapter 4.4® - Changing Advanced Function Keys (BGN, C/Y, P/Y), Converting from Nominal Interest to Effective Interest Rates using BAII Financial Calculator

In some advanced calculations, you might have 4 periods in a year (quarterly) or just 2 periods in a year (semi-annual) or even 12 periods in a year (monthly). So far we have assumed our calculation above on 1 period a year (annual). Other calculations might require you to set monthly compounding instead of annual compounding. How do you deal with these changes?

Compounding of Interest per Period (C/Y) and Number of Periods per Year (P/Y)

Example 1: Say there are 4 periods per year, and monthly compounding. Do the following in your calculator:

 i) Press 2nd I/Y ii) P/Y = 4, press Enter then iii) C/Y = 12, press Enter, then iv) Once these entries have been made, exit from this area by pressing CE/C.

Interest Rate Conversion using BA II Plus Financial Calculator

This function is used for finding nominal and effective rates of interest, that are slightly different from each other.

 NOM = Nominal rate of interest (stated rate of interest). EFF = Effective rate of interest (annual percentage rate).

Example: If 8% is compounded monthly, what is the effective rate of interest?

 i) Press 2nd, and then press 2 ii) NOM = Press 8, Enter then iii) EFF= This is the variable that needs to be calculated, so press to bypass it for now. iv) C/Y = Press 12, then Enter, then v) EFF = Press CPT vi) Final Answer = 8.3%

Exercise Problems for Converting Nominal/Effective Interest Rates

1) Calculate the ANNUAL effective rate given a nominal interest rate of 8%

 On your BA II plus financial calculator i) Press 2nd, and then press 2 ii) NOM = Press 8, Enter then iii) EFF= Press iv) C/Y = Press 1, then Enter, then v) EFF = Press CPT vi) Answer = 8%

2) Calculate the SEMI-ANNUAL effective rate given a nominal interest rate of 8%

 On your BA II plus financial calculator i) Press 2nd, and then press 2 ii) NOM = Press 8, Enter then iii) EFF= Press iv) C/Y = Press 2, then Enter, then v) EFF = Press CPT vi) Answer = 8.16%

3) Calculate the QUARTERLY effective rate given a nominal interest rate of 8%

 On your BA II plus financial calculator i) Press 2nd, and then press 2 ii) NOM = Press 8, Enter then iii) EFF= Press iv) C/Y = Press 4, then Enter, then v) EFF = Press CPT vi) Answer = 8.24%

4) Calculate the MONTHLY effective rate given a nominal interest rate of 8%

 On your BA II plus financial calculator i) Press 2nd, and then press 2 ii) NOM = Press 8, Enter then iii) EFF= Press iv) C/Y = Press 12, then Enter, then v) EFF = Press CPT vi) Answer = 8.299% or round up to 8.3%