What is the correct way to annualize an interest rate in financial decisions?
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The correct way to annualize an interest rate is by computing the Effective Annual interest rate.
It is the annual growth which allows compounding meaning you earn inters on interest.
We calculate this by getting the quoted rate and Dividing it by the total periods, then adding one to it.
Once we add one to it, we raise it to the number of periods.
Once this is done we subtract one from it. This gives us the Effective Annual rate.
It is the annual growth which allows compounding meaning you earn inters on interest.
We calculate this by getting the quoted rate and Dividing it by the total periods, then adding one to it.
Once we add one to it, we raise it to the number of periods.
Once this is done we subtract one from it. This gives us the Effective Annual rate.
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