• anonymous
assuming an annual interest rate of 4% what is the difference between the following ways of calculating monthly interest rates? (1+0.04)^(1/12) & 0.04/12
  • Stacey Warren - Expert
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  • amistre64
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
  • anonymous
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

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