If the annual interest rate is 10%,
In some cases, to de-annualize it for a 6 month period, we use 10% * 0.5 = 5%, then we discount the cash flow by (1+5%), this is espeically the case with bond, in which 0.5 is the result of 6 months divided by 12 months
In some other cases, to do the same thing, we use (1+10%)^0.5 to discount the cash flow.
I know one is nominal, one is effective, but is there any rule for me to follow, this is, in my opinion, a pure matter of convention
Thanks.
In some cases, to de-annualize it for a 6 month period, we use 10% * 0.5 = 5%, then we discount the cash flow by (1+5%), this is espeically the case with bond, in which 0.5 is the result of 6 months divided by 12 months
In some other cases, to do the same thing, we use (1+10%)^0.5 to discount the cash flow.
I know one is nominal, one is effective, but is there any rule for me to follow, this is, in my opinion, a pure matter of convention
Thanks.