Enjoyed the video? Then please press the like button, and subscribe to the channel! A relevant related video on my channel is the one on simple vs compound interest th-cam.com/video/aeekQAP5yDY/w-d-xo.html And if you want to play around with the effective annual interest rate in Excel, then this video is for you: th-cam.com/video/8PkMM1_DseU/w-d-xo.html
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It seems like you are trying to get someone else to answer your homework question for you. You will learn a lot more if you research it yourself. The video is only 6 minutes long, you will find the answer if you watch it.
Why don't banks and investment firms just calculate the monthly returns of a nominal yearly interest rate of, let's say, 10% as 1.1^(1/12), which would actually yield the exact value that amounts to the nominal rate? Why introduce that transparency problem in the first place by making the approximation of dividing the nominal rate by 12, if calculating the 12th root would make it so much simpler, direct, and realistic?
Good catch! I should have phrased that as: "The higher the NOMINAL interest rate, and the more frequent the compounding periods, the bigger the difference between nominal and effective rate".
Enjoyed the video? Then please press the like button, and subscribe to the channel! A relevant related video on my channel is the one on simple vs compound interest th-cam.com/video/aeekQAP5yDY/w-d-xo.html And if you want to play around with the effective annual interest rate in Excel, then this video is for you: th-cam.com/video/8PkMM1_DseU/w-d-xo.html
The best clarification I've ever seen. Thanks for you efforts.
Glad it was helpful! Thank you for the kind words.
Please consider supporting the channel through a membership: th-cam.com/channels/QQJnyU8fALcOqqpyyIN4sg.htmljoin
Dude, I learn so much from these videos of yours! Thank you.
Glad you like them! Happy to help. Please share the word with friends and colleagues.
very clear explanation, thanks!
Happy to help! Play around with it a bit in Excel, that really helps to get your head around it: th-cam.com/video/8PkMM1_DseU/w-d-xo.html
What are the key differences between EIR and nominal interest rates?
It seems like you are trying to get someone else to answer your homework question for you. You will learn a lot more if you research it yourself. The video is only 6 minutes long, you will find the answer if you watch it.
You channel is a treasure
Thank you so much for the kind words!!! Please share with friends and colleagues.
Why don't banks and investment firms just calculate the monthly returns of a nominal yearly interest rate of, let's say, 10% as 1.1^(1/12), which would actually yield the exact value that amounts to the nominal rate? Why introduce that transparency problem in the first place by making the approximation of dividing the nominal rate by 12, if calculating the 12th root would make it so much simpler, direct, and realistic?
Either their IT systems are so old that they can't handle the change, and/or they will gladly make some money "behind your back".
Amazing🎉
Thanks 😄
Thank you ❤
You're welcome 😊 Happy New Year!
When you say the higher the interest rate, do you mean the higher the nominal rate or higher EAR? I am a bit confused...
Good catch! I should have phrased that as: "The higher the NOMINAL interest rate, and the more frequent the compounding periods, the bigger the difference between nominal and effective rate".
Play around with it a bit in Excel, and you will see how nominal rate and EAR relate: th-cam.com/video/8PkMM1_DseU/w-d-xo.html
But at a nominal rate after 1 year, do we take the original principal value or new value 10,600 as in this case
Correct. In the second year, for the Bank A example, the $10,600 is the new basis for compounding.
@@TheFinanceStoryteller ok thanks