Interest Rate Conversions

[saulherman]

Hi there I am trying to really understand interest rate conversions in a very simple way.


What I still can not really understand is when to simply divide and interest rate or when to raise it to the power of

Like if you have a 12% rate and you want the monthly rate… do you divide it by 12 or do you take it to the power of ^1/12

Is there a rule in general.

Thanks and not just for that example but in general??

 

[lukasz. wos]

There is no general rule.
When the interest/coupon is compounding or is reinvested, one should use r^(number of periods).
When there is no compounding and the interest is just drawn away, one should use simle multiplication or fractioning.
Another thing is the matter of convention - i.e. BEY - bond equivalent yield.
When you are determining what is the semi-annual interest rate on a bond which pays r% anuualy, you just divide r by 2 and that is it.
Make as many test questions covering that area and the force will come to you.

 

[Jimmy87]

Hi, can you refer to the chapter where it states that you should raise the rate to the power of 1/12?