Comment by quelltext
2 years ago
> beware though, Wikipedia is bound to lead to errors by defining the monthly rate as yearly rate / 12
Looks like all the calculators do that as well. What's the right way?
2 years ago
> beware though, Wikipedia is bound to lead to errors by defining the monthly rate as yearly rate / 12
Looks like all the calculators do that as well. What's the right way?
The effective interest rate should be calculated and then converted to the monthly rate:
$$ \left( 1 + \frac{i_a}{n_a} \right)^{n_a} = \left( 1 + \frac{i_b}{n_b} \right)^{n_b} = \left( 1 + \frac{i_{\text{annual}} }{1} \right)^{1} $$
https://www.investopedia.com/terms/e/effectiveinterest.asp
This is a bit of a rabbit hole. The right way is whatever is agreed, and there are many ways to agree it.
https://en.m.wikipedia.org/wiki/Day_count_convention
My mortgage company charges interest based on the number of days in the month divided by 365. I have replicated their calculation like this. I'm not sure what they do in leap years - there are at least 3 distinct approaches.
My mortgage company seems to use the same formula.
I assume to take compounding into account, you want the 12th root. Instead of 12% → 1%, 1.12^(1/12) gives around 0.95%.
It could be correct, it just depends. Also according to the comments banks do all kinds of weird things.