I just took a math test and one question asked me to find the "effective interest rate" of an account compounded quarterly at 4.25%. I wrote my teacher a note saying "trick question silly, I need a principal amount to do this ;)" and then wrote what it would be in theory if P was 1. Think I got 1.05 or 105%.

Did I do this right?

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2 months ago

You don't need the principal to know the interest rate

2 months ago

dammit

how do I find rate without principal? He gives partial credit so if I did the 105% right I may be in the clear

2 months ago

If you had just made the principal amount a variable you would have found the answer. Always assume that information not given to you is a variable.

2 months ago

account compounded quarterly at 4.25%

is this rate yearly?

2 months ago

Quarterly is 1/4 of a year.

2 months ago

It's not like it was an equation, I set it to X originally and didn't know what to do with my graphing calculator from there. What should I have done?

2 months ago

yeah that's how frequently it's compounded, but is the nominal rate on an yearly base? also should the effective interest rate be expressed on a yearly base as well? if it's not specified i'm going to assume they both are. finally how did you get 105% out of the data given to you?

2 months ago

this entire thread

It's 18.1%

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2 months ago

This.

Also, fuck economics for using a term like effective interest implying a yearly duration.

Just make everything a rate and people would still get the question wrong

2 months ago

The post you quoted is wrong

2 months ago

Starting balance: 1.00

Balance after first quarter: 1.0425

2nd:1.0425^2

3rd: 1.0425^3

4th:1.0425^4 = 1.1811....

What is the definition of effective interest if it's not this?

2 months ago

Literally the same as what I posted.

t = 1

n = 4

I think it's funny finance yards have to have a formula for every basic word problem they come across.

2 months ago

The quarterly rate is 1/4th of 4.25% or 1.0625%

Since that a percentage, we divide by 100 to get 0.010625

If you started with a dollar (the amount is arbitrary) after 3 months you have 1.010625 dollars.

Your balance increases by the same fraction every 3 months.

After a year you have 1.010625^4 = 1.043182154 dollars.

The effective interest rate is your gain, converted back into a percentage.

4.3182154 percent

That is, you'd have the same money in the bank if they only compounded yearly at 4.3182154 percent. Hence, "effective rate".

2 months ago

If you know where I can get 18 percent FDIC insured, please tell me so I can open an account there!

(Actually, given today's rates, I'd happily settle for 4.25% annually.)

2 months ago

It's funny you still get the result wrong despite the babby formula

2 months ago

Doesn't have to be realistic. But the lack of proper grammar is astounding. It literally reads as 4.25 per quarter, not per year.

2 months ago

I know. I was in a waiting room last week and a "basics of investing" video was playing in the background.

The numbers really showed how old the presentation was.

I commented because 18% is so unreasonable.

People who "plug & chug" (punch numbers into a formula. Accept whatever comes out.) aren't getting an education at all. A chimp could do that.

You're supposed to learn to think!

2 months ago

the rate you actual nignog

put x for the principle and then find the rate

2 months ago

**financeformulas.net**/Loan_Payment_Formula.html

[math]

P = \dfrac{r \cdot PV}{1 - (1+r)^{-n}}

[/math]

2 months ago