On Apr 21, 2:55*pm, Dermot wrote:

The calculation was explained to me as 6% per annum.......I assumed from
that it was compounded each year....as you have explained.......I will need
to double check I have the correct understanding of the required calculation.
The seed of doubt!

A pretty big seed, IMHO. To some degree, it depends on the type of
financial institution. A mutual fund or other securities investment
is likely to mean APY -- the compounded annual rate. But a bank is
likely to mean the (nominal) "interest rate".

Are we talking about a US financial institution or otherwise?

A US financial institution should know to use the words "interest
rate" or "APY" (aka APR; annual percentage yield/rate). In US law,
"interest rate" specifically means the non-compounded rate (aka
nominal rate), whereas "APY" specifically means the compounded rate.


Can you explain "6% Nominal Interest for me....to ensure I understand the
term. Would that be 6% of First Year + 6% of Second Year = 6% of remaining
year fraction?.....not compounding?

It has nothing to do with year-to-year compounding or not. In US law,
interest must compound at least annually. At issue is how intra-
annual rates are computed (e.g. daily, monthly, quarterly).

Following US law, given a nominal annual rate "r" and a compounding
frequency "t", the rate per compounding period is r/t. Here, I am
using t=365 for daily [1], 52 for weekly, 12 for monthly, and 4 for
quarterly.

The APY (or APR, a deprecated term which is still used frequently) is
the annual effect (aka "effective rate") of that period compounding.
That is, if the periodic rate is r/t, the APY is (1 + r/t)^t -1, where
"^" means "to the power of" (that is, multplied by itself t times).

The Excel Analysis ToolPak does have the functions NOMINAL and
EFFECT. You can read their Help pages. (That is true for Excel 2003,
at least.) Personally, I don't use them.

Bringing this down to earth, if a bank specifies an "interest
rate" (those words have a technical meaning) of 6% with daily
compounding, then the APY is (1 + 6%)^365 - 1, which is the same as
FV(6%/365, 365, 0, -1) - 1. That is approximately 6.1831%.

Conversely, if a bank or investment institution specifies an APY of
6.1831%, that compares to a nominal "interest rate" with daily
compounding of 365 * ((1 + 6.1831%)^(1/365) - 1), which is the same as
365*RATE(365, 0, -1, 1+6.1831%). Of course, that should be 6%. (I
always use the exact result of interest calculations, not their
approximation.)

Complicating the whole thing is that (US) banks usually use an average
daily balance method to compute the periodic rate and, hence, the
APY. But that should make a difference only if the balance is
changing due to deposits and withdrawals. In your simple case, you
specified only an initial investment (or a value on a particular
date).

HTH.


Endnotes:

[1] Financial institutions have the option of using 366 for the daily
frequency in leap years. I presume that most do because it is to
their advantage. (A very-slightly lower daily rate. But remember:
large banks multiply that infinitesimal fractional difference times
thousands of accounts, some of which have 6- and 7-digit balances.)

Errata....

On Apr 21, 4:28*pm, joeu2004 I wrote:
On Apr 21, 2:55*pm, Dermot wrote:

The calculation was explained to me as 6% per annum.......I assumed from
that it was compounded each year....as you have explained.......I will need
to double check I have the correct understanding of the required calculation.
The seed of doubt!

A pretty big seed, IMHO.

Unless you are talking about a bond.

Hi Joeu

Thanks for the thorough explanations, some of the functions I did not know
existed.

It's annual statutory interest of 6% on each individual annual amount.
The calculation is not compounded...it's an annual interest of 6% on the
first year
The second year is calculated separately at another 6% and then the
remaining days to get the value I am seeking....I am not sure what category
this would fall under but it's not compounded.

What formula would you suggest for the above calculation.

Thanks again
"joeu2004" wrote:

Errata....

On Apr 21, 4:28 pm, joeu2004 I wrote:
On Apr 21, 2:55 pm, Dermot wrote:

The calculation was explained to me as 6% per annum.......I assumed from
that it was compounded each year....as you have explained.......I will need
to double check I have the correct understanding of the required calculation.
The seed of doubt!

A pretty big seed, IMHO.

Unless you are talking about a bond.

On Apr 22, 11:35*am, Dermot wrote:
It's *annual statutory interest of 6% on each individual annual amount.

Again, it would help to know what type of investment you are talking
about. Sounds like a bond.

It might also help to know what country's laws control the "statutory"
interest rate.


The calculation is not compounded...it's an annual interest of 6% on the
first year
The second year is calculated separately at another 6% and then the
remaining days to get the value I am seeking....I am not sure what category
this would fall under but it's not compounded.

It is called simple interest.


What formula would you suggest for the above calculation.

For simple interest, the approximate formula would be:

=14000 * 6% * (A2 - A1) / 365

where A1 and A2 are the starting and ending dates of the investment
respectively.

A more precise formula might use 14000*6%*DATEDIF(A1,A2,"y") +
14000*6%*f/365, where "f" is the number of remaining days -- similar
to what you hypothesized in your original posting.

Sorry if that is not specific enough for your use. I have to think
more about how to compute "f". I believe there are also some
"gotchas" to beware when using DATEDIF. But I have to run.

Post back if you need details.

Hi Joeu

Quote
A more precise formula might use 14000*6%*DATEDIF(A1,A2,"y") +
14000*6%*f/365, where "f" is the number of remaining days -- similar
to what you hypothesized in your original posting.

Sorry if that is not specific enough for your use. I have to think
more about how to compute "f". I believe there are also some
"gotchas" to beware when using DATEDIF. But I have to run.

Ah, it's the "F" part that I was trying to figure out how to incorporate
it.....without overcomplicating things......I've done a good job of that
already!!!

Thanks in advance


"joeu2004" wrote:

On Apr 22, 11:35 am, Dermot wrote:
It's annual statutory interest of 6% on each individual annual amount.

Again, it would help to know what type of investment you are talking
about. Sounds like a bond.

It might also help to know what country's laws control the "statutory"
interest rate.


The calculation is not compounded...it's an annual interest of 6% on the
first year
The second year is calculated separately at another 6% and then the
remaining days to get the value I am seeking....I am not sure what category
this would fall under but it's not compounded.

It is called simple interest.


What formula would you suggest for the above calculation.

For simple interest, the approximate formula would be:

=14000 * 6% * (A2 - A1) / 365

where A1 and A2 are the starting and ending dates of the investment
respectively.

A more precise formula might use 14000*6%*DATEDIF(A1,A2,"y") +
14000*6%*f/365, where "f" is the number of remaining days -- similar
to what you hypothesized in your original posting.

Sorry if that is not specific enough for your use. I have to think
more about how to compute "f". I believe there are also some
"gotchas" to beware when using DATEDIF. But I have to run.

Post back if you need details.

Joeu2004
How would you incorporate the "F" in the formula?

"Dermot" wrote:

Hi Joeu

Quote
A more precise formula might use 14000*6%*DATEDIF(A1,A2,"y") +
14000*6%*f/365, where "f" is the number of remaining days -- similar
to what you hypothesized in your original posting.

Sorry if that is not specific enough for your use. I have to think
more about how to compute "f". I believe there are also some
"gotchas" to beware when using DATEDIF. But I have to run.

Ah, it's the "F" part that I was trying to figure out how to incorporate
it.....without overcomplicating things......I've done a good job of that
already!!!

Thanks in advance


"joeu2004" wrote:

On Apr 22, 11:35 am, Dermot wrote:
It's annual statutory interest of 6% on each individual annual amount.

Again, it would help to know what type of investment you are talking
about. Sounds like a bond.

It might also help to know what country's laws control the "statutory"
interest rate.


The calculation is not compounded...it's an annual interest of 6% on the
first year
The second year is calculated separately at another 6% and then the
remaining days to get the value I am seeking....I am not sure what category
this would fall under but it's not compounded.

It is called simple interest.


What formula would you suggest for the above calculation.

For simple interest, the approximate formula would be:

=14000 * 6% * (A2 - A1) / 365

where A1 and A2 are the starting and ending dates of the investment
respectively.

A more precise formula might use 14000*6%*DATEDIF(A1,A2,"y") +
14000*6%*f/365, where "f" is the number of remaining days -- similar
to what you hypothesized in your original posting.

Sorry if that is not specific enough for your use. I have to think
more about how to compute "f". I believe there are also some
"gotchas" to beware when using DATEDIF. But I have to run.

Post back if you need details.

On Apr 23, 5:47 pm, Dermot wrote:
A more precise formula might use 14000*6%*DATEDIF(A1,A2,"y") +
14000*6%*f/365, where "f" is the number of remaining days -- similar
to what you hypothesized in your original posting.

How would you incorporate the "F" in the formula?

One way -- not very elegant, but it seems to work:

=14000*6%*datedif(A1,A2,"y") +
14000*6%*(A2 - date(year(A1)+datedif(A1,A2,"y"),month(A1),day(A1) ))/
365

And instead of 365, you might write (date(1+year(A1),1,1)-
date(year(A1),1,1)), if you want to use 366 in leap years.

I'm "sure" there is a better, easier way. But it eludes me at the
moment.

Also, I am leery about using DATEDIF. I remember it has its quirks.
But I cannot remember them off-hand. Perhaps my recollection is
wrong.


----- previous posting -----

On Apr 23, 5:47*pm, Dermot wrote:
Joeu2004
How would you incorporate the "F" in the formula?



"Dermot" wrote:
Hi Joeu

Quote
A more precise formula might use 14000*6%*DATEDIF(A1,A2,"y") +
14000*6%*f/365, where "f" is the number of remaining days -- similar
to what you hypothesized in your original posting.

Sorry if that is not specific enough for your use. I have to think
more about how to compute "f". I believe there are also some
"gotchas" to beware when using DATEDIF. But I have to run.

Ah, it's the "F" part that I was trying to figure out how to incorporate
it.....without overcomplicating things......I've done a good job of that
already!!!

Thanks in advance

"joeu2004" wrote:

On Apr 22, 11:35 am, Dermot wrote:
It's *annual statutory interest of 6% on each individual annual amount.

Again, it would help to know what type of investment you are talking
about. *Sounds like a bond.

It might also help to know what country's laws control the "statutory"
interest rate.

The calculation is not compounded...it's an annual interest of 6% on the
first year
The second year is calculated separately at another 6% and then the
remaining days to get the value I am seeking....I am not sure what category
this would fall under but it's not compounded.

It is called simple interest.

What formula would you suggest for the above calculation.

For simple interest, the approximate formula would be:

=14000 * 6% * (A2 - A1) / 365

where A1 and A2 are the starting and ending dates of the investment
respectively.

A more precise formula might use 14000*6%*DATEDIF(A1,A2,"y") +
14000*6%*f/365, where "f" is the number of remaining days -- similar
to what you hypothesized in your original posting.

Sorry if that is not specific enough for your use. *I have to think
more about how to compute "f". *I believe there are also some
"gotchas" to beware when using DATEDIF. *But I have to run.

Post back if you need details.

Errata*2....

On Apr 21, 4:28*pm, I wrote:
On Apr 21, 2:55*pm, Dermot wrote:
Can you explain "6% Nominal Interest for me....to ensure I understand the
term. *Would that be 6% of First Year + 6% of Second Year = 6% of remaining
year fraction?.....not compounding?

It has nothing to do with year-to-year compounding or not. *In US law,
interest must compound at least annually. *At issue is how intra-
annual rates are computed (e.g. daily, monthly, quarterly).

Unless you are talking about a bond.

But you since your subject line refers to a compounded rate, I ass-u-
me-d you were talking about an investment whose yield compounds.

[PS: My previous errata quoted the wrong part of Dermot's posting. I
would have linked this follow-up to that first errata, but sigh, I do
not see it in Google Groups yet.]