assuming an annual interest rate of 4%
what is the difference between the following ways of calculating monthly interest rates?
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the first one compounds the interest.
12 (1.04)^(1/12) = 12.039....
the second is just simple interest acculmulated over the year.
12 (.04/12) = .04
....or something along those lines
the 4% in the (1+0.04)^(1/12) equation is the effective annual rate(EAR) (that takes compounding into account). So you are getting the monthly return from EAR.
In the second equation the 4% is the APR (annual percentage rate) and you are getting the monthly rate from it