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ex 23.5 finan fm/2

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  • ex 23.5 finan fm/2

    i was doing this problem the other day and i guess the problem i encountered was how do we know the force of interest is equal to interest over the period of a year? is that by definition? how do we know its not equal to a quarter... this really tripped me up and if anyone could explain that would be great...

  • #2
    You can convert the force of interest into the annual effective interest rate. Then you can compare their values.

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    • #3
      e to the force of interest is equal to 1 + i is this what you mean by comparing?

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      • #4
        yes, when either the force of interest or i is given, you can find the other.

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        • #5
          i is ALWAYS effective annual interest rate right?

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          • #6
            Yes i is always the eff. annual interest. By definition, force of interest is the limit of i|(n) when n approaches infinity or in another word, the force of interest is the NOMINAL rate of interest compounded continuously. I hope you'll find this helpful.

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