A Teaching Note on the Effective Interest Rate, Periodic Interest Rate and Compounding Frequency

Youngsik Kwak and H. James Williams
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Youngsik Kwak: Department of Accounting and Finance, School of Management, Delaware State University, Dover, Delaware 19901, USA
H. James Williams: School of Business, North Carolina Central University, Durham, North Carolina 27707, USA

Chapter 4 in Advances in Quantitative Analysis of Finance and Accounting:New Series, 2004, pp 65-72 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractStudents often experience problems in solving time-value-of-money problems — primarily because they do not know which interest rate to use from among the nominal, effective, and periodic rates. In this paper we show the relationships among different interest rates and clarify the use of these rates in the time-value-of money problems. In particular, we show how to calculate the periodic rate, given the nominal rate, because students must use the periodic rate when they use either the “formula” or “financial cal culator” method to compute the interest rate.

Keywords: Discretionary Accruals; Futures Price Volatility; Bid-Ask Spread Components; CEO Compensation; Executive Cash Compensation; Convertible Debts; Environmental Liabilities (search for similar items in EconPapers)
Date: 2004
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