User`s guide

Time Value of Money Calculations
79
Interest Rate Conversions
The Interest Conversion application uses three keys: \Ó, \Ð, and
\Í. They convert between nominal and annual effective interest rates.
If you know an annual nominal interest rate and you wish to solve for the corresponding
annual effective rate:
1. Enter the nominal rate and press \Ó.
2. Enter the number of compounding periods and press \Í.
3. Calculate the effective rate by pressing \Ð.
To calculate a nominal rate from a known effective rate:
1. Enter the effective rate and press \Ð.
2. Enter the number of compounding periods and press \Í.
3. Calculate the nominal rate by pressing \Ó.
In the TVM application, \Ó and Ò share the same memory.
Interest conversions are used primarily for two types of problems:
• Comparing investments with different compounding periods.
• Solving TVM problems where the payment period and the interest period differ.
Investments With Different Compounding Periods
Example: Comparing Investments
You are considering opening a savings account in one of three banks. Which bank has the
most favorable interest rate?
First Bank
First Bank 6.70% annual interest, compounded quarterly
Second Bank 6.65% annual interest, compounded monthly
Third Bank 6.63% annual interest, compounded 360 times per year
Table 6-23 Calculating the interest rate (First bank)
Keys Display Description
S7j\Ó
6.70 Stores nominal rate.
Y\Í
4.00 Stores quarterly compounding
periods.