Converting Nominal to Effective Interest Rates | Mini-Course Playlist Lesson 05
Converting Nominal Rates to Effective Rates
First of all, I want to tell you that this video is part of a mini-course on Financial Mathematics for Investors. If you haven't watched the previous lessons, scroll down a bit in the description and start with lesson 01 in the mini-course playlist! In today's lesson, I will show you how to convert nominal rates to effective rates.
This is the last lesson before we start talking about fixed income indicators. Therefore, if you are behind on lessons, it's best to catch up on the content!
Without further ado, what is this rate conversion about? Let's suppose you have an annual interest rate, but you need to know what it is equivalent to per month. That's right, we will find out through the conversion of rates in different periods. For this, it is important that you know that there are two types of rates: proportional and equivalent. The proportional rate is implicit in simple capitalization regimes, while the equivalent rate relates to compound capitalization regimes.
To calculate these rates, we have formulas that, as I've already mentioned, are useless if you don't understand why we use them. Therefore, in this lesson, I will work with you on equivalent rate calculations, rate conversions, and converting annual rates to monthly rates. This way, you'll not only learn the theory, but also how this content can appear in your daily life.
So grab your HP12C calculator and come with me to master financial mathematics and the conversion of nominal rates to effective rates once and for all.
00:58 Proportional Rate vs. Equivalent Rate
02:38 Proportional Rate
03:15 Equivalent Rate
03:56 Exercise - Equivalent Rate
05:32 Exercise - Rate Conversion
06:45 Exercise - Annual Rate to Monthly Rate
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