Book Image

Python for Finance

By : Yuxing Yan
Book Image

Python for Finance

By: Yuxing Yan

Overview of this book

Table of Contents (20 chapters)
Python for Finance
About the Author
About the Reviewers

Converting the interest rates

Assume that bank A offers 5 percent compounding monthly, while bank B offers 5.1 percent compounding quarterly. Which bank should we borrow from in order to enjoy a lower interest rate? These examples are associated with conversion between different interest rates. First, let's look at the following formula used to estimate effective annual rate (EAR) for a given Annual Percentage Rate (APR).

Here, m is the compounding frequency within one year. For example, if the annual rate is 5 percent compounding semiannually, its equivalent effective annual rate will be 5.0625 percent. From the two banks' offers, we would choose the offer of bank A since the cost of borrowing (effective annual rate) is cheaper, as shown in the following code:


For a mortgage estimate, if the annual rate is 5 percent, compounding monthly, the effective monthly rate will be 0.41667 (0.05/12)....