Basic Math & Time Value of Money: Exercises
6. Effective rate. We are often given a nominal rate of return for an asset that compounds at a frequency that is higher
or lower than annual. To makes rates comparable, we will often compute the effective rate at an annual frequency, which is
defined below, where N is the number of annual compouding periods.
You are given a monthly nominal rate, monthly_nominal, and the daily nominal rate, daily_nominal.
Assume N=12 for monthly rates and N=252 for annual rates. Compute the effective rates.
monthly_nominal <- 0.05
daily_nominal <- 0.04
# Compute the effective rate for monthly_nominal.
monthly_effective <- (1+___/12)^___ - 1
# Compute the effective rate for daily_nominal.
daily_effective <- ___
# Print monthly_effective.
print(___)
# Print daily_effective.
___
# Compute the effective rate for monthly_nominal.
monthly_effective <- (1+monthly_nominal/12)^12 - 1
# Compute the effective rate for daily_nominal.
daily_effective <- (1+daily_nominal/252)^252 - 1
# Print monthly_effective.
print(monthly_effective)
# Print daily_effective.
print(daily_effective)
test_error()
test_object("monthly_effective", incorrect_msg="Did you use N=12?")
test_object("daily_effective", incorrect_msg="Did you use N=252?")
test_function("print", incorrect_msg="Did you use the `print()` function?")
success_msg("Well done! Was the effective rate higher for the monthly or daily rate?")
Check that you have used the right values of
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