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anonymous

  • 5 years ago

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

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  1. Owlfred
    • 5 years ago
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    Hoot! You just asked your first question! Hang tight while I find people to answer it for you. You can thank people who give you good answers by clicking the 'Good Answer' button on the right!

  2. amistre64
    • 5 years ago
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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

  3. anonymous
    • 5 years ago
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    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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