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question 7.2

V

verma.kunal13

Member
I am so damn confused with this convertibility of rate of interest... could someone please help me out, how in question 7.2, the rate of interest 6.2% pa convertible half-yearly is convertible into effective 6.2961% pa? please highlight this convertible thing again.

many thanks!
 
I like to think of it in terms of reinvesting the money, it makes it a little easier to understand. If you have a rate of interest convertible m times per year (in your case, 2), think of investing at that rate of interest for 1/m of the year, then taking that money and reinvesting for another 1/m of the year, m times.

So in your case, 6.2% convertible half yearly means investing at 6.2% per year for 1/2 of a year (so you get half of 6.2%), then reinvesting it at the same rate for another 1/2 of a year.

This gives (1 + (0.062/2)) ^ 2 = 1.062961, or a return of 6.2961%.

Does that make it any clearer?
 
thanks

Thank you so much, I understand it well now. But I see, in some questions rate of interest is convertible using the same method explained by you. On the other hand we calculate effective rate of interest as i^m/m... how to distinguish between the two? Please help.

a zillion thanks!
 
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