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Capital budgeting

2.3 Nominal interest rate

The nominal interest rate is the stated interest rate for a time period – for example a
month or a year.

2.4 Effective interest ate

The effective interest rate is the interest rate that includes the effects of compounding
a nominal interest rate.
n
r = (1 + i/n) – 1

r – effective interest rate

i – nominal interest rate

n – number of time periods

Illustrations and further practice

Now try TYU question 4 from Chapter 14

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