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:
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.
Example: If 8% is compounded monthly, what is the effective rate of interest?
Exercise Problems for Converting Nominal/Effective Interest Rates
1) Calculate the ANNUAL effective rate given a nominal interest rate of 8%
2) Calculate the SEMI-ANNUAL effective rate given a nominal interest rate of 8%
3) Calculate the QUARTERLY effective rate given a nominal interest rate of 8%
4) Calculate the MONTHLY effective rate given a nominal interest rate of 8%