Question

Hello .. suppose i have inflation rate f = 3% compounded annually and i want to use it in monthly payment .. how i can do that?

please show all steps

Answer 1

In order to use the inflation rate for monthly payments we will have to find the monthly equivalent rate of the annually compounded inflation rate.

Let the monthly compounded rate be m%

The following formula will be used.

(1 + annually compounded rate) = (1 + monthly compounded rate)¹²

or, (1+ f) = (1 + m)¹²

or, m = {(1+ f)^1/12 - 1 }

or, m = (1.03^1/12 - 1)

or, m = 0.2466%

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