Funny how the calculation seems to be done backwards
(For an initial 100% interest) "If the interest is credited twice in the year, the interest rate for each 6 months will be 50%"
And of course this is wrong, because the interest is not 50% but (2^1/2) - 1 (that is, 41%) since x * 1.4142(first interest payment) * 1.4142(second interest payment) should be 2*x
It isn't wrong, it's just a convention in finance. The Nominal Annual Rate is presented "without adjustment for the full effect of compounding" [1]. In the provided example, a 100% nominal annual rate becomes a 125% effective annual rate, since it is credited twice in the year.
Comments
Funny how the calculation seems to be done backwards
(For an initial 100% interest) "If the interest is credited twice in the year, the interest rate for each 6 months will be 50%"
And of course this is wrong, because the interest is not 50% but (2^1/2) - 1 (that is, 41%) since x * 1.4142(first interest payment) * 1.4142(second interest payment) should be 2*x
It isn't wrong, it's just a convention in finance. The Nominal Annual Rate is presented "without adjustment for the full effect of compounding" [1]. In the provided example, a 100% nominal annual rate becomes a 125% effective annual rate, since it is credited twice in the year.
[1] http://en.wikipedia.org/wiki/Nominal_interest_rate#Nominal_v...