NOMINAL (SIMPLE) VS EFFECTIVE (COMPOUND) INTERESTSIMPLE INTEREST ONLY EARNS INTEREST ON THE ORIGINAL P RINCIPAL. EXAMPLE: DEPOSIT $100 IN TO AN ACCOUNT EARNING 8% SIMPLE INTEREST. THE ACCOUNT WILL EARN SNOMINAL (SIMPLE) VS EFFECTIVE (COMPOUND) INTERESTSIMPLE INTEREST ONLY EARNS INTEREST ON THE ORIGINAL P RINCIPAL. EXAMPLE: DEPOSIT $100 IN TO AN ACCOUNT EARNING 8% SIMPLE INTEREST. THE ACCOUNT WILL EARN SNOMINAL (SIMPLE) VS EFFECTIVE (COMPOUND) INTERESTSIMPLE INTEREST ONLY EARNS INTEREST ON THE ORIGINAL P RINCIPAL. EXAMPLE: DEPOSIT $100 IN TO AN ACCOUNT EARNING 8% SIMPLE INTEREST. THE ACCOUNT WILL EARN SNOMINAL (SIMPLE) VS EFFECTIVE (COMPOUND) INTERESTSIMPLE INTEREST ONLY EARNS INTEREST ON THE ORIGINAL P RINCIPAL. EXAMPLE: DEPOSIT $100 IN TO AN ACCOUNT EARNING 8% SIMPLE INTEREST. THE ACCOUNT WILL EARN SNOMINAL (SIMPLE) VS EFFECTIVE (COMPOUND) INTERESTSIMPLE INTEREST ONLY EARNS INTEREST ON THE ORIGINAL P RINCIPAL. EXAMPLE: DEPOSIT $100 IN TO AN ACCOUNT EARNING 8% SIMPLE INTEREST. THE ACCOUNT WILL EARN S& EVERY YEAR IN INTEREST. THUS AT THE END OF YEAR 5, THERE WILL BE 100+5**$8=140 IN THE ACCOUNT. THE INTEREST OVER THE 5 YEARS WOULD BE 40%.COMPOUND INTEREST EARNS INTEREST ON THE MONEY IN THE ACCOUNT WHEN THE INTEREST IS COMPOUNDED. FOR THE PREVIOUS EXAMPLE, AT THE END OF YEAR ONE, THE INTEREST EARNED WOULD BE 100**.08=$8. AT THE END OF YEAR TWO, THE INTEREST EARNED WOULD BE 108**.08=$8.64. THE INTEREST EARNED EACH YEAR WOULD CONTINUE TO INCREASE AS THE BALANCE INCREASES. THE BALANCE AT THE END OF FIVE YEARS WOULD BE 100**(1.08)5=$146.93. THE EFFECTIVE INTREST RATE FOR THE FIVE YEARS WOULD BE 146.93-100100=46.93%.THE DIFFERENCE BETWEEN COMPOUND INTEREST AND SIMPLE INTEREST DEPENDS ON THE COMPOUNDING FREQUENCY. IN THE PREVIOUS EXAMPLE, IF INTEREST WAS COMPOUNDED EVERY 5 YEARS, THE EFFECTIVE RATE FOR THE 5 YEARS WOULD BE (1+.4)1=40%, WHICH IS THE SAME AS THE SIMPLE RATE FOR THAT PERIOD.THE COMPOUND INTEREST RATE FOR THE FIVE YEARS AS A FUNCTION OF COMPOUNDING FREQUENCY FOR SAMPLE COMPOUNDING PERIODS IS:ANNUAL COMPOUNDING : (1+.08)5-1=46.93%MONTHLY COMPOUNDING: (1+.0812)60=48.98%DAILY COMPOUNDING: ,(1+.08365)365**5=49.18%CONTINUOUS COMPOUNDING : e.08**5-1=49.182%SAMPLE PROBLEMSThe effective interest rate is 14.79% per 35 weeks, compounded every five weeks. What is the effective rate per 50 weeks?You will receive $1000 every third year for the next 30 years, beginning three years from now. Interest is stated as 7.9% annual effective rate, compounded monthly. What is the present value of this cash flow series?You will receive $500 every six months for the next 5 years. Interest is stated as 9.35% effective per year, compounded quarterly. How much will be in the account at the end of the 5 years?In exchange for a $10,000 deposit today, you will receive $500 every 3 months for 10 years. What effective annual rate will you earn if interest is compounded every 3 months.In exchange for $5000 today, you will receive $500 every 6 months for 8 years. If interest is compounded monthly, what is the annual effective rate earned?