You're looking for problems which don't exist. While compound interest has
complexities, you don't have to make it harder than it is. When you are
converting the compounding period, the type of loan, and its payment
structure have nothing to do with it.
You just have to look at the results to realize the validity of the
calculation.
If the annual interest rate is 6%, and the loan was compounded monthly, the
monthly rate would be 0.5%
In this case, with interest compounded quarterly, the monthly rate turns out
to be 0.498%. That makes sense.
Take a look at the documentation for the holy grail of financial
functions -- the HP12C calculator. You'll see it does these conversions the
same way.
Regards,
Fred.
Suppose your annual interest rate is 6%. Your compounded
quarterly interest rate is therefore 1.5%. If you borrowed $100,
then one quarter later, you would owe $101.50.
Doesn't that analysis assume that the principal remains at $100 for
the entire quarter?
Doesn't the fact that we are making monthly payments and interest is
calculated daily change your assumption?
Moreover, are you assuming a constant payment amount for the entire
term of the loan? ("nper" in your formula?) Is that a valid
assumption for this type of loan?
I don't know. But a google search for "define: capitalization"
indicates that the term means that the unpaid interest is added to the
principal, and the payment "may" change.
If the payment does not change, I ass-u-me that means that the balloon
payment increases when the loan matures. But I have trouble with that
interpretation.
Whadaya think?
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