Part III- The Time Value of Money
10.10: A Word on Compounding Frequency and Annual Equivalent Rates
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From Introduction to Financial Analysis by LibreTexts (Kenneth S. Bigel, Touro University), used under the CC BY 4.0 licence. Written for a general audience, not for NEPSE.
- 1What is the difference between 10% annual rate, compounded annually versus a 10% annual rate, compounded quarter- in terms of FV of $1?
- 2How may the two rates be equated? In other words, how may I define the annual frequency at a rate equivalent to the quarterly frequency?
- 3What happens as the compounding frequency increases?
Quarterly, (1 + .10/4) 1 x 4 = (1.025) 4 = 1.1038
That is, 10% quarterly is equivalent to 10.38% annually!
In other words, the Annual Percentage Rate ( APR ) for 10% compounded quarterly, is 10.38%!
This chapter at LibreTexts (Kenneth S. Bigel, Touro University). Tables and text are reproduced; images, videos and quizzes are not.