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    4.3.6 Equivalent Rates

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    Tin Lauguico
    This document discusses equivalent interest rates. It provides formulas to calculate the compound interest rate equivalent to another rate, the simple interest rate equivalent to a compound rate, and the compound rate equivalent to a simple rate. Examples are given to demonstrate calculating equivalent rates when money is invested for different periods of time at various given rates.

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    4.3.6 Equivalent Rates

    Uploaded by

    Tin Lauguico
    414 views14 pages
    This document discusses equivalent interest rates. It provides formulas to calculate the compound interest rate equivalent to another rate, the simple interest rate equivalent to a compound rate, and the compound rate equivalent to a simple rate. Examples are given to demonstrate calculating equivalent rates when money is invested for different periods of time at various given rates.

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    4.3.6 Equivalent Rates

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    This document discusses equivalent interest rates. It provides formulas to calculate the compound interest rate equivalent to another rate, the simple interest rate equivalent to a compound rate, and the compound rate equivalent to a simple rate. Examples are given to demonstrate calculating equivalent rates when money is invested for different periods of time at various given rates.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    414 views14 pages

    4.3.6 Equivalent Rates

    Uploaded by

    Tin Lauguico
    This document discusses equivalent interest rates. It provides formulas to calculate the compound interest rate equivalent to another rate, the simple interest rate equivalent to a compound rate, and the compound rate equivalent to a simple rate. Examples are given to demonstrate calculating equivalent rates when money is invested for different periods of time at various given rates.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 14

    EECO101

    ENGINEERING ECONOMY
    Compound
    Interest
    Equivalent Rates
    Equivalent Rates ( eq)

    If two rates produce equal interests on the same principal amount in


    the same period of time.

    Case 1
    • To determine the compound interest rate equivalent to another
    compound interest rate.
    𝑚
    𝐺 𝑚𝑒
    Formula: 𝑒𝑞 = 𝑚𝑒 1 +𝑚 −1

    where
    eq - the unknown rate
    me - the conversion period of the missing rate
    G - the given compound interest rate
    m - the conversion period of the given rate
    What rate compounded semi-annually is
    equivalent to 6% compounded monthly?

    2 12
    𝑟 0.06
    1+ = 1+
    2 12

    𝑟 = 6.08%
    What rate converted monthly is equivalent to 9.2%
    compounded quarterly?
    12 4
    𝑟 0.092
    1+ = 1+
    12 4

    𝑟 = 9.13%
    If you are to invest P500 000 at 14% converted
    semi-annually for 7 years, what rate
    compounded quarterly could you just as well
    invest your money?

    4 2
    𝑟 0.14
    1+ = 1+
    4 2

    𝑟 = 13.76%
    Case 2
    • To determine the simple interest rate equivalent to
    compound interest rate.

    1+𝑖 𝑛 −1
    Formula: 𝑟𝑠 =
    𝑡

    where: rs - the unknown simple interest


    i - the periodic rate
    n - the total number of conversion
    periods for the whole term
    t - the term or time of the
    investment
    What simple interest rate is equivalent to
    5 ½ % compounded semi-annually, if
    money is invested for 5.5 years?
    𝑛
    1 + 𝑟𝑠 𝑡 = 1 + 𝑖

    11
    0.055
    1 + 𝑟𝑠 (5.5) = 1 +
    2

    𝑟𝑠 = 6.32%
    Find the simple interest rate
    equivalent to 10% compounded
    quarterly for 3 years and 3 months.
    𝑛
    1 + 𝑟𝑠 𝑡 = 1 + 𝑖

    13
    3 0.1
    1 + 𝑟𝑠 3 = 1+
    12 4

    𝑟𝑠 = 11.65%
    Case 3
    • To determine the compound interest rate
    equivalent to a given simple interest rate.
    1
    Formula: 𝑟𝑐 = 𝑚 1 + 𝑟𝑠 𝑡 𝑛 −1

    where: rc - the unknown compound interest


    m - conversion period of the missing
    rate
    rs - the given simple interest
    t - the term or time of the investment
    n - the number of conversion period
    for the whole term
    What rate compounded quarterly is
    1
    equivalent to simple interest rate of 7 %
    2
    for 7 years?
    𝑛
    1 + 𝑟𝑠 𝑡 = 1 + 𝑖

    𝑟 28
    1 + 0.075 7 = 1 +
    4

    𝑟 = 6.07%
    1
    Ms. Castro plans to invest P100,000 at 12 %
    2
    simple interest for three years. At what rate
    compounded semi-annually could she just as well
    invest for the same period of time?

    𝑛
    1 + 𝑟𝑠 𝑡 = 1 + 𝑖

    𝑟 6
    1 + 0.125 3 = 1 +
    2

    𝑟 = 10.9%
    If term is 15 months, what rate
    compounded quarterly is
    equivalent to 12%
    a.) simple interest?
    b.) compounded semi annually?
    𝑎. 𝑟 = 11.34%
    𝑏. 𝑟 = 11.83%

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