Gross Interest to AER

  Abel 10:01 12 May 2007
Locked

Could someone please explain the following formula, which converts gross annual interest to the annual equivalent rate of interest. ((1+i/(12*100)12-1)*100.Try as I may I am unable to see how it makes gross interest of 5.8% (actually 5.795%) equate to 5.95%AER

Abel

  MAJ 11:48 12 May 2007

The formula doesn't seem to make sense have you typed it correctly? Try this. click here

  Abel 12:09 12 May 2007

Thanks for your interest MAJ. Unless I'm mistaken, surely the equasion in example "d" of your referral is identical, except only that it produces a monthly interest figure for an AER. However, it does seem more understandable and I shall give it some study.

Abel

  MAJ 12:23 12 May 2007

I'm working from a memory of O Level maths that is now over 30 years old, Abel, but the example you give has 3 open brackets and only 2 closed brackets, that's incorrect so far if I remember correctly. The number of open brackets in a formula should equal the number of closed brackets. Also, IIRC, the internal brackets are worked out first, that would mean you would have (forgetting about the extra bracket at the start):

(1+i/(1200)11)*100

it doesn't make sense to me.

  Abel 12:35 12 May 2007

Thanks again MAJ. It was matriculation in my day and I certainly did'nt reach that standard. I agree with you, however, only from experience of using Excel formula, that the number of open brackets should be equalled by the number of closed brackets.

Abel

  Abel 12:37 12 May 2007

Even didn't if you like.

Abel

  MAJ 12:47 12 May 2007

It's definitely going to take someone better at maths than I am, Abel, lol.

  Abel 16:21 12 May 2007

MAJ and anyone else that might like to contribute their help. The formula I gave originally was indeed wrong as MAJ pointed out. It should have been:((1+i/(12*100))^12 -1)*100. Where i=interest and 12 the months in the year. I now understand the formula a little better except, I'm having difficulty in understanding the use of the exponential sign. If it's not too complicated to explain, would those mathmeticians out there enlighten me please

Abel

  Abel 16:27 12 May 2007

Or any mathemeticians would be good. What's happening to my spelling and punctuation today?

Abel

  MAJ 16:40 12 May 2007

I can't explain the reason for it, Abel, but the formula looks more sensible, glad you got it sorted out. ;)

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