Re: Problems with calculating the proper compounding

On 1 fév, 19:38, Jim <j...@xxxxxxxxxxxx> wrote:
Hello,

I'm creating a spread*** that automatically determines the payment
amount for a mortgage.

The problem that I'm running into is that when thecompoundingfor the
interest rate is different from that of the payment frequency, I'm not
calculating the equivalent rate correctly.

For example:

J12 = 5.75%
Monthly payments
Amortization = 40
n = 40 * 12 = 480

PV
PMT = ~~~~~~~~~~~~~~~~~~~~~~~~~~~~
1 - (1 + (J1/12) ) ^ (-n))
~~~~~~~~~~~~~~~~~~
(J1/12)

^ = exponent

I do that, and then I input J1 instead of J12.

It calculates it very closely, but I know that I'm doing something
wrong.

Can someone please tell me?

Your email address has a .ca suffix so I assume you are in Canada.
The thing is, canadian banks computing mortgage interest rates
differently than in the US, for some reason unknown to me. The rate
is calculated like this:
(1 + i/2)^(1/k)
where i is the annual rate in decimal, and
k is the number of payment periods in the half-year.

So for example if the annual rate is 12% and the payment frequency is
monthly that means there a 6 months so 6 payment periods in the half-
year so you compute (1+0.12/2)^(1/6) = 0.975...% rate per period
instead of 1% as would be the case in the US.

I think this method is only used for mortgages. I don't know if that
solves your problem but if you are in canada then your formula is
certainly incorrect.
.

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