I'm also struggling with these. If it mentions nominal rates I think I'm OK as I just use i to the (p) and get i from that. The thing I struggle with is if they say "convertible quarterly" or something.
If an interest rate is 8% pa convertible quarterly, how do you work out i (i.e. the interest rate per annum). How do you work out i (i.e. the interest rate per quarter or however it's phrased)?
Sometimes I see them just say "8% pa convertible quarterly is the same as 2% effective pa quarterly rate" but then other examples in the answers they seem to do like (1+something)^p -1 and then other times they do something else. It's so confusing. Why can you just divide 8 by 4 to get 2 and other times you can't? I can't believe how important it is to understand this to answer all the questions yet the introduction to this is poorly explained and seemingly skipped over as if it's not important or is easy!
Any help converting these would be appreciated.
Thanks.
Edit: Found it in the notes. The solution to 6.8 confused me so much numerous times. The main things I circled were: "An interest rate of 8% pa convertible quarterly is equivalent to an effective quarterly rate of 2%". Now I'm trying to learn this as "it says per annum which is 12 months and we want 3 months so divide by 4, fine" but then later it says: "Alternatively, you could have worked in months using an effective monthly interest rate." So I'm thinking, OK, 2% for 3 months, so for 1 month it's just 0.666% right? Wrong...apparently it's 0.66227%. Where's the logic in this? Please help! It's killing me.
Last edited by a moderator: Feb 10, 2011