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On a practice exam I am given a $.06$ compounded semi-annually and need it converted to monthly. I assumed it would be $.005$ because it has annual percentage of $.06/12$ but my answer is slightly off so I wanted to have this verified

K. Gibson
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2 Answers2

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If we have interest rate $i$ compounded in $n$ periods per year; the effective per annum interest is given by

$$(1+\frac{i}{n})^n$$

If we want to calculate some $i'$ associated with an $n'$ for the same per annum rate we must set the two to be equal:

$$(1+\frac{i}{n})^n=(1+\frac{i'}{n'})^{n'}$$

Given that in your case you know $n'$ that leaves 1 equation, 1 variable; easy to solve.

Bertrand Einstein IV
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The equation for semi-annually is $A=P(1+\frac{r}{2})^{2t} $ while for monthly it is $A=P(1+\frac{R}{12})^{12t}$ . Making these equations equal with r = 0.06 yields $$P(1+\frac{0.06}{2})^{2t}=P(1+\frac{R}{12})^{12t}$$ If we solve the above equation we get R = 0.05926…

Math777
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