assuming an annual interest rate of 4%
what is the difference between the following ways of calculating monthly interest rates?
(1+0.04)^(1/12)
&
0.04/12

Question

assuming an annual interest rate of 4%
what is the difference between the following ways of calculating monthly interest rates?
(1+0.04)^(1/12) 
&
0.04/12

owlfred · Answer

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amistre64 · Answer

the first one compounds the interest.

12 (1.04)^(1/12) = 12.039....

the second is just simple interest acculmulated over the year.

12 (.04/12) = .04

....or something along those lines

anonymous · Answer

the 4% in the (1+0.04)^(1/12)  equation is the effective annual rate(EAR) (that takes compounding into account). So you are getting the monthly return from EAR.
In the second equation the 4% is the APR (annual percentage rate) and you are getting the monthly rate from it