3.

TYPES OF INTEREST RATES:

3.1 Nominal Interest Rate ( in)

The nominal interest rate is an annual interest rate where it is also specified the
conversion frequency (or conversion period number) and from this information one can
determine the interest rate for the period.

3.2 Tasa de Interés Proporcional o del Periodo ( ip)

It is the interest that the monetary unit earns in a period generally shorter than one year.

The proportional interest rate is calculated by dividing the nominal rate by the number of periods.
(m) considered.

Example:

The nominal interest rate (inIt is 60% capitalizable quarterly. It is requested to calculate the rate of
proportional interest of the period (ip).

12 months
m=
3 months
in
i p=
m
ip= 15%

Examples of nominal interest rate with its respective conversion period as well as his
corresponding interest rate of the period:

Nominal rate Period of Interest rate of

of interest conversion period (ip)
Per year (m)
12% annual convertible 1 12%
12% semi-annual convertible 2 6%
12% quarterly convertible 4 3%
12% monthly convertible 12 1%

3.3 Effective Interest Rate (ie)

It is the interest earned by the monetary unit in a year, depending on a nominal interest rate.
and the number of compounding periods.
Deduction of the formula:

P = A present amount
F = An amount in the future (after one year)
inNominal interest rate
m = Number of periods in the year.
iandEffective interest rate
ipPeriod interest rate.

i e=(1+I p)m −1

F=P(1+i p)m
In a year, it is necessary that F = P (1+ie), replacing the value F in the previous expression yields:

m
P1+i=P(1+i)
( e) p

(1 )  1 m
n
ie
m

ie (1 ip)m 1

Example:

If a bank paid 12% annual interest compounded quarterly, what is the future value in a
year of S/. 100.

Solution:

P = 100
in= 12%
12
m= =4
3
100 F=?

0 (one year or 4 quarters) 4

F = P (1 + ip)m
F = 100(1+0.03)4= 100 (F/P, 3%, 4)
F = 112.55

From the expression F = P (1+in)n, where (inr is the annual nominal interest and n is the number of years that
deduce, en el Anexo B, las fórmulas de interés compuesto continuamente.
The following table shows us the effect of the capitalization frequency:

Nominal Interest Rate Effective Interest Rate

with capitalization
5% annually 5.0000 %
5% semester 5.0625 %
5% quarterly 5.0940 %
5% monthly 5.1160 %

3.4 Overdue Interest Rate ( i )

It is the interest rate that is applied as a factor to the initial capital (P) in order to obtain an interest (I) in
the unit of time.
If you want to know the interest earned in the unit of time, the following formula is used:

I=Pi
The accumulated amount at the end of the period is obtained from:

F=P+I

The deductions from the formulas made in (2.2) were carried out by applying the concept of rate of
matured interest.

3.5 Advance Interest Rate or Discount Rate (d)

It is the interest rate that is applied as a factor to the final value (F), to obtain an interest (D),
called discount or advanced interest.
If you want to know the discount over time, the following formula is used:

D=dF

As observed, the discount rate refers to a future amount and the interest rate to a
present amount.
As a result, the present amount is calculated by:

P=F-D

Relationship between the Interest Rate (i) and Discount (d)

The discount (or interest) can be calculated in a unit of time, using the discount rate or
the interest rate.

In the first case D = F d .... (a)

In the second house I = P i .... (b)

For D = I, therefore equate (a) with (b)

 Fd=Pi

P i
d=
F (c)

For a period it is given: F = P(1 + i) ... (of)

Replacing the value F of (d') in (c).

Pi I
d= =
P (1+ I ) 1+i
In this formula, it is observed that the discount rate is lower than the interest rate.
The formula can also be presented in the following way:

i=
1-d

3.6 Interest Rate on Rebate

Es una tasa de interés que se cobra sobre los saldos de la deuda pendiente. Por ejemplo
If we have a debt of S/. 100,000 at 60% payable in four semiannual installments.
In the first semester, the payment for interest amounts to S/. 30,000.

60% (S/.100,000)
2
In the second, the outstanding debt is S/. 75,000 (a quarter of the debt has been amortized), the
interest is S/. 22,500.

60% (S/. 75,000) and so on.

2

Problems:

1.- What is the effective interest rate of an investor who pays S/. 3,000 for a bond?
which has an age of 8 months, with a nominal value of S/.2,500 and a nominal interest
of 20% capitalizable quarterly and with a retention period of 1 year?

Solution:

-2500 F

0 1 (year)

20%
ip= =5%=it
4
Finding the F:

F = 2,500 (F/P, 5%, 4)

F =S/. 3,038.77
 3000 F = 3,038.77

0 1 8 12

F = 3,000 (F/P, in, 4 )

3,038.77= 3000 (F/ P, in, 4)

1.01 = (F/P, in, 4)

From the formula F=P (1+i)n

Finding in :

in= 0.00249

finding iand:
( 1 + ie) = ( 1 + in)12
ie=(1+in )12- 1= 3.03%

A construction company received a loan of S/. 130,000 to be paid back.

en 3 meses. La tasa de interés trimestral es de 10%. Calcular el interés, el monto total y la tasa
of discount if instead of a loan a discount operation is carried out.

Solution:

As I = D I=F-P
Amount
F = P (1 + i)
F = 130,000(1 + 0.1) = 143000

Finding the interest:

I = 130000x10% = 13,000
D = I = 13,000

Finding discount rate:

D=d F

D 13,000
d= = x100
F 143,000
0.1
d 9.09%
0.1 1
3.- It is necessary to have S/. 8000 to buy some computers in the next 3 years, it is desired to know
How much should be deflated monthly at an annual nominal interest rate of 12% compounded?
semiannually.

Solución:

A A F = 8,000

0 1 2 36 (months)

in
=is=6%
m=2 , in 12% m

(1 + is) = (1 + im)6 ( 1 + is )1/6- 1 = im im0.00975

In 3 years there will be:

A = F (A/F, im36)

A = 8,000 (A/F, 0.97%, 36)

A = 186.53

4.- How much money will need to be withdrawn from a savings account if these withdrawals are made?
semiannually, due to investments made in the purchase of bonds.
After 2 years, one has S/. 150,000 in the savings account.
In order not to affect that balance, a small amount of S/. 100 is deposited monthly at the rate
of 12% interest, compounded quarterly.

Solution:

m=4 P F
I'm 12%
=it= =3%
m 4
0 i t= 3 % 1 (quarter)

0 1 2 3 (months)
(1 + in)3= ( 1 + it)

in( 1 + it )1/3– 1

in0.99 %

Analyzing the deposits:

F = A (F/A, in,24) = A (F/A, i, n)

F1= 100 (F/A, in, 24)

Analyzing the withdrawals:

F = A (F/A,in, n)

F2= - A (F/A , is , 4 )

From F = 150,000

150,000 = 100 (F/A, in, 24) - A (F/A, is4)

Finding is:
(1 + is ) = (1 + it)2

is( 1 + ti)21

is= 6.09 %

From the Graph:

A A -A
100 100 100 100 100

0 1 2 6 12 24 (months)

100(F / A,in,24)−150,000
A=
( F/ A i s 4 )
100(F / A,0.99%,24)−150,000
A=
( F/ A,6.09%,4)
A = -33,627.96

5.- There is a bond with a nominal value of S/. 1,000, with a life of 2 years and with an interest
monthly at 2%. How much would this investor be willing to pay for the bond if they have
13 months have passed since the validity. The effective interest rate is 36%.

Solution: 1,000
P inv=? 20 20 20
……………. ………………...

0 1 2 13 14 15 24

Interés Mensual (I):

I = Vnip (1,000)(0.02) = 20

ie0.36
1 + ie = (1 + in)12

Investor:

iinv=(1.36)1/121

Pinv= 20 (P/A, iinv, 11) + 1,000 (P/F,i, 11)

inv

Pinv=189.32 + 754.82 = 944.14

6.-If a person deposits S/.1,000 today, 3,000 in four years, and 1,500 in 6 years, at a
6% annual interest rate compounded semi-annually. How much money will you have in your account?
In 10 years?

Solution:

1000 3000 1500 F=?

0 1 2 3 4 5 6 7 8 9 10 ([Link])
0 2 4 6 8 10 12 14 16 18 20 (Semiannual)

First Method:

It consists of calculating the effective annual interest and then using it to find F in year 10.

iand= ( 1 + 0.06/2)2-1 = 6.09%

So:

F = 1,000(F/P, 6.09%,10) + 3,000(F/P, 6.09%,6) + 1,500(F/P, 6.09%,4)

F = S/. 3,841.93

Second Method:

Since the capitalization is semiannual at an interest rate of 3% per period, the future value will be calculated.
considering the semiannual periods.

F = 1,000 (F/P,3%,20) + 3,000 (F/P,3%,12) + 1,500 (F/P,3%,8)

F = S/. 3,841.93

7.- Calculate the monthly deposit needed to accumulate S/.5,000 in 5 years at a 6% nominal rate.
annual compounded daily.

Solution:

5,000
A A A A A=?
…………………….
 0 1 2 59 60 (months)

The effective monthly interest is calculated as follows:

0.06
[Link]=id=
360

Thirty is considered the number of days per month, consequently there are 30 periods of
capitalization in the month. Effective interest for the period:

In five years, there will be a total of 60% deposits.

0 . 0 6 30
im=(1+ ) −1
360
im0.501%

A = F(A/F, 0.501%,60)

A = 5,000 (A/F, 0.501%, 60)

A = S/. 71.64 monthly.

Bond Case.

The bond is a valued document issued by an institution for the purpose of financing
projects, this document states the duration and the interest that needs to be paid
Periodically to the bondholder, in other types of bonds the interest is compounded and at maturity
the bondholder receives the nominal value plus the accrued interest.

8.- A person has a Reconstruction bond with a nominal value of S/. 100,000 at 56%
capitalizable quarterly and with a validity period of 2 years. How much would you be willing to
pay for the bond an investor who wants to earn 90% capitalizable quarterly?

Solution:
100,000 F =?

0 1 2 (year)
0 1 2 3 4 5 6 7 8 quarter

The bondholder would receive the following amount after two years.

F = 100,000(F/P, 56/4%, 8)
F = S/. 285,529

The investor, based on what they want to earn, would be willing to pay in the present:

P = 285,259 (P/F, 90/4%, 8)

P = S/. 56253.57
9.-A person has bonds of S/.1,000 each at 60%. The interest will be paid quarterly being the
validity period of 5 years. If an investor wishes to earn 90% capitalizable
monthly. How much would you be willing to pay for each bond?

Solution:
150 150 150 150 1,000
………..

0 1 5 (year)
0 1 2 3 4 20 (Quarter)

Bond Data:

Valor Nominal = S/. 1,000

Duración (n) = 5 años o 20 (trimestres)
Tasa nominal Anual = 60%
Tasa trimestral = i = 15%

Quarterly Interest = 15% x 1,000 = S/. 150

Datos del Inversionista:

Tasa Nominal Anual = 90%
Monthly Rate im7.5%

The investor, upon acquiring the bond in the present (t=0), will receive over the course of 5 years, the
amounts shown in the graph but since he wants to obtain the 90% capitalizable
monthly, you will need to make the following calculations to determine the equivalent amount of
pay for the bonus.

Procedure:

a) Calculate the effective quarterly rate since the investor desires monthly compounding.
b) Calculate the present value of the amounts in the chart, using the rate determined in (a).

SOLUTION:

(1+r) = (1+i)m)3

r = (1,075)3 1

r = 0.2423

b). Amount willing to pay for each bond (VP = Present value)

VP = 150 (P/A, 24.23%, 20) + 1000 (P/F, 24.23%, 20)

VP= S/. 624

10.- Ten coworkers from a company decide to form a board in the following
conditions:

The agreed contribution from each participant who has not obtained the Board shall be S/.
 100,000 monthly.

The total amount collected at the end of each month will be raffled among the participants who
they have not yet obtained the amount.

The winner of the draw for the amount commits to repay in the months
remaining, the amount owed in equal monthly installments considering for this
I calculate a rate of 5% monthly interest to offset the effect of inflation.

It is requested to build a table indicating the monthly contributions of each participant.

Solution:

First Month:

The total amount raised in the first month in thousands of soles is:
P = 100 x 10 = S/.1000

If the first participant gets the Board, then their debt is:
D = 1,000 - 100 = S/. 900

Therefore, the monthly payment (installment) during the following 9 months is:
A = 900 (A/P, 5%, 9)
A = S/. 126.62

1000
(100) A A A
……………………………….

1 2 9 10

Second Month:

Cantidad Recaudada: P = (100) x 9 + 126.3 = 1,026.3

If the second participant obtains the debt board, it is:

D = 1,026.3 - 100 (F/A, 5%, 2)

D = S/. 821.3

La cuota mensual es:

A = 821.3 (A/P, 5%, 8)

A = S/. 127.1

1,026.3
(100) (100) A A A
…………………

1 2 3 9 10
In general, the following formula can be applied to find the monthly payment for each
participant who has obtained the Board.

A = P - 100 (F/A, 5%n) (A/P, 5%, (10 - n))

n: 1,2, ......,10

Applying this formula results in the following table:

Participant 1 2 3 ............. 6 7 8
per month
1 100.0 100.0 100.0 ............. 100.0 100.0 100.0
2 126.3 - - ............. - - -
3 - 127.3 - ............. - - -
4 - - 127.6 ............. - - -
5 - - - ............. - - -
6 - - - ............. - - -
7 - - - ............. 129.1 - -
8 - - - ............. - 129.6 -
9 - - - ............. - - 130.1
10 - - - ............. - - -

11.- Calculate the overdue and effective interest rate on S/. 1000 for 90 days if the discount is S/.
130

Solution:

D=dF

d = (130/1,000) = 0.13

d
i=
1−d
i = 14.94% , n = 360/90

iand(1+i)^n
iand= 459.76%

Consequently, the overdue and effective interest rates are 14.94% and 174.55%, respectively.

12.-If the effective annual rate (i eIt is 40%. What is the discount (D) on a letter for S/.100?
expires in 90 days.
Solution:

F = S/.100
ie= 40%
Period (p) = 90 days
Number of periods in the year (n) = 360/90 = 4
Calculation of the period interest (ip)
ip(1+ie)1/n-1 = 8.7%

Calculation of the discount rate (d)

ip
d=
1+ip ..........(2)

d= 8%

Calculation of the discount (D)

D=dF

D = S/. 8.00

Additionally, with the previous information, the interest for the period is calculated.

P ip= F d = D
D
ip=
p
d
ip=
F −D
ip0.087%

13.-With a rate of 15%, transform the following non-uniform series into a uniform series: one
a sum of S/. 20,000 is presented at the beginning of the first year, in the following ten years, it
they present sums of S/. 8,000 at the end of each year for the first 4 years and 10,000 at the end
of each year for the remaining 6 years. Complementary amounts of S/. 6,000 are presented to the
beginning of the third and sixth year.

Solution:

(In thousands of new soles)

The flowchart will be as follows:

6 6
20 8 8 8 8 10 10 10 10 10 10
 0 1 2 3 4 5 6 7 8 9 10

Calculation of the annual series:

A = 20 + 8(P/A, 15%, 4) + 10(P/A, 15%, 6)(P/F, 15%, 4) + 6(P/F, 15%, 2) + 6(P/F, 15%,
5) (A/P, 15%, 10)

A = S/.68939.680

14.-Determine the value of an amount X of Soles, knowing that the following is carried out
deposits:

X : at the beginning of the year 1

X + S/.100 : at the end of year 3

At an interest rate of 12% compounded monthly. These deposits must cover 6 payments.
quarterly payments of S/.300 starting from the fifth year.

Solution:

X X+100
A A A A A A A = 300

0 1 2 3 4 5 6

Present Value of Deposits:

P = X + (X + 100) (P/F, 1%, 36)................. (1)

Present Value of Quarterly Payments:

P = [300 + 300(P/A, ip(P/F, 1%, 48)...... (2)

3
0.03
(
ip= 1+
3 )
−1=3.0301%

Equating (1) and (2) gives:

X = S/. 569.56

15.-Una persona tiene un bono de S/. 1,000 al 70%. El interés se pagará trimestralmente siendo el
validity period of 6 years. If an investor wants to earn 100% compounded every two
Months How much would you be willing to pay for the bond?

Solution:
Bono:

i p=(70/ 4 )%
I = S/. 1,000 x 0.175
n = 24 periods
P = 175(P/A, 26%, 24) + 1,000(P/F, 26%, 24)
P = VA (26%, 24, -175) + VA (26%, 24, -1000)
P = S/. 674.4

Investor

i p =(100/6)%
Quarterly interest rates(i T)

1 1.5
i= 1+
T ( ) 6
−1=26%
16.-A person has a Reconstruction bond with the following characteristics:

Nominal value of S/. 100

Tasa de interés : 56% capitalizable trimestralmente
Validity of the bond: two years
Months remaining until its redemption: 13

How much would an investor be willing to pay for the bond who seeks an effective yield?
of 181%?

Solución:

100 Pi=? F
…………………..…………………………………

0 11 24 months

56
i= %=14%
4
Value of the bond after two years (F)

F = 100 (F/P, 14%, 8)

F = S/. 285,259

Period interest rate (ip) for the investor

ip8.99%
Amount that the investor can pay (P1)
For n = 13

F 285.259
p,= =
( 1+i ) (1 . 0 8 9 9) n
n

P = S/. 93.156

17.-A person who deposited an amount A in a financial institution three years ago wants
determine the amount of money you currently have, you have the following for that
information:

YEAR TASA DE INTERES % CAPITALIZACION

1 60 monthly
2 70 biweekly
3 90 diary

a) How much money does he/she have after 3 years?

b) What is the effective rate and the equivalent nominal rate of quarterly capitalization?

Solution:
A

0 1 2 3

a) Value in year 3 (A3)

0.6 12 0.7 24 0.9 360

A =A(1 + ) (1 + ) (1 + )
3 12 24 360
A3= 8.797 A

b) Equivalent effective rate (ie)

A (1 + ie)3= 8.797 A

ie 106.43%

Equivalent nominal rate (in)

4
i=(
n √
2.0643 −1) x4

i 4
i=e 1+
4 ( )
−1
in 79.46%

18.-An important manufacturing company purchased a semi-automatic machine for a value of

S/.13,000. Its annual maintenance and operating cost amounted to S/. 1,700. Five years
after the initial acquisition, the company decided to buy an additional unit so that the
machine completely automatic. The additional unit had an original cost of S/.7,100. The
The operating cost of the machine under fully automatic conditions was S/.900
annual. If the company used the machine for 16 years and then sold the unit
additional automatic at S/.1,800 What was the equivalent uniform annual cost of the machine at
an interest rate of 9%?

Solution:

7,100 1,800 (sale)

13,000 1,700 1,700 900 900
………………………………………….

0 1 5 6 16

Present value of acquisitions and sales....................... (P1)

P1= 13,000 + 7,100 (P/F, 9%, 5) - 1,800 (P/F, 9%, 16)

P1= 17161.14727

Present value of operating cost.................................. (P2)

P21,700 (P/A, 9%, 5) - 900 (P/A, 9%, 11)(P/F, 9%, 5)

P2 = 2631.790911
Uniform annual cost (A)
P1+ P2= 19792.93091
A = (P1+ P2(A/P, 9%, 16) = S2,381.09

19.-At the beginning of the first year, person A makes a deposit of S/.100 in a financial institution. The
the interest rate is 80% compounded quarterly, at the end of the first semester of
first year, another person B makes a deposit of S/. 100 in another financial entity at a rate of
90% of capitalization continues. How much time must pass for person B to have
50% more than A?

Solution:

A: 100
…………………………………

0 1 2 year
80% quarterly cap

B: 100
…………………………………

0 1 2 año

90% continuous cap.

Calculation of the future value of A (FA)

FA= P (F/P, 20%, n) = 100 [(1 + 0.20)4]n= 100 x (2.0736)n

Calculation of present value B (PB)

100 100
p=B =
m
e e 9x 0.5
0. ( )

Calculation of the annual interest rate (iB)

0.9
i=e−1=155.96%⇒146
B %

Calculation of the future value of B (FB)

FB= 63.7628 (1 + 1.46)n

FB1.5 F

n = 2.63 years.

A man has s/ 20000 and wants to deposit enough money in order to obtain s/ 50000.
to educate his son; if the son is 5 years old and starts his studies at 18 years old, how much
The gentleman must deposit in order to earn 8% interest with capitalization.
quarterly.

Solution:

P =? F = 50000
5 6 7 18
………………………...

0 1 2 13

in = 8% capitalizable quarterly
We have to m = 4
So:
In 8 %
i=p = =2 %
m4
ie(1+ip)41
ie8.24%
P = F(P/F,ie,n)
P = 50000(P/F, 8.24%, 13)
P = 17861.94
RTA 17861.94

21.- How much money can we withdraw quarterly for 15 years from a retirement fund that
It produces 8% annual interest compounded semiannually. There is currently 40,000.

Solution:

P = 4000 A A A
……………………………………………

0 1 4 15

in =8% annual capitalizable semiannually

in 8
i=
p = =4
m2
it= (1+0.04)1/2-1

it1.98%

A = P (P/A,it,n)

A = 40000(P/A, 1.98%,60)

A = 1145.15

RTA 1145.15

22.- How many monthly deposits of $45 must a person make in order to accumulate
$10,000 if the interest rate is 10% per year compounded semi-annually?

Solution:

45 45 45 45
…….…………………………

0 1 2 3 n

in 10% annual compounded semiannually

in 10
ip= 2 = 2 =5%
im (1+0.05)1/61
im0.82%

We know:

F = A (F/A, im, n)

10000 = 45 (F/A, 0.0082, n)

n
( )
1+0.0082−1
10000=45 ( ) 0.0082
2.822 = 1.0082n
Log2.822 = n log1.0082
0.45 = (n) 0.00354
n = 127
RTA =127

23.- Ten participants in a meeting ($100/each). The modality to obtain the meeting is by auction.

The first month came out with $150.

The second month came out with $ 160.
The third month came out with $ 175.

At the end of the fourth month, a participant withdraws from the Board due to travel reasons.
It is requested to determine the amount that should be delivered.

Solution:

For the 1st month:

Receive: $1000 .
Deuda : $ 900
Cuota : $ 150
# de Cuotas : 9
Calculation of interest:
P = D(P/A,i,9)
900=150(P/A, i, 9)
I = 8.98%
Approximately:
i = 9.00%

Periodo Deuda Amortzación Interés Balance Total Pagar

 2 900.00 69 81 831 150
3 831.00 75.21 74.79 755.79 150
4 755.79 81.99 68.021 673.81 150
5 673.81 89.31 60.69 584.45 150
6 584.49 97.39 52.60 487.09 150
7 487.09 106.16 43.811 380.85 150
8 380.85 115.76 34.285 265.14 150
9 265.14 126.13 23.866 139.08 150
10 139.08 137.48 12.52 1.51 150

For the 2nd month:

Receive = 150 + 9x100 = 1050

Deuda = 1050 - (100 + (900+81)/9) = 841.
Cuota = 160
# de Cuotas = 8
Calculation of interest:
P = D(P/A,i,8)
841 = 160(P/A, i, 8); i = 10.4%

Debt Period Amortzación Interés Saldo Total Pagar

3 841 75.9 84.1 765.1 160
4 765.1 83.49 76.51 681.61 160
5 681.61 91.83 68.16 589.71 160
6 589.71 101.02 58.97 488.74 160
7 488.71 111.12 48.87 377.62 160
8 377.61 122.23 37.76 255.38 160
9 255.38 134.46 25.51 120.92 160
10 120.92 147.99 12.09 -26.98 160

For the 3rd month:

Receive = 150 + 160 + 8x100 = 1110

Deuda: 780.7
Fee: 175
Of Quotas: 7
Calculation of interest:
P = D (P/A, i, 7)
780.7 = 175(P/A, i, 7)
i = 12.7%

Period Debt Amortization Interest Total Balance Payable

4 780.70 75.81 99.14 704.84 175
5 704.84 85.48 89.51 619.36 175
6 619.36 96.34 78.65 523.02 175
7 523.02 108.54 66.42 414.44 175
8 414.44 122.36 52.63 292.08 175
 9 292.08 137.90 37.09 154.17 175
10 154.17 155.41 19.58 -1.23 175

For the 4th month:

Receive = 150 + 160 + 175 + 7x100 = 1185

Debt = 1185 - (755.79+68.02) / 7 + (765.1+76.51)/7 + (780.7+99.1)/7 + 100)

Deuda = 1185 – 463.59 = 721.41

It is delivered = 1185 - 721.41 = 463.59

24.-It is a bank loan of 40 million soles at an effective interest rate of

27%, but the bank charges interest in advance.

The equivalent discount rate must be found and the payment schedules of the debt over 4
months (in decreasing, constant, and increasing installments)

Solution:

Being:

i = 0.27

1
1−d =
1+I
So:

d = 0.2126
d = 21.26%.