HomeNEWSwhat is it and how does it work

what is it and how does it work

By doing an equivalent rate simulation, we were able to know precisely the value of debts in installments, how much an investment will yield, etc. But what are equivalent rates?

An Equivalent Rate Simulation is a calculation where we apply the rates to a cash amount in the same amount of time. Confused? Let’s now understand more precisely what equivalent rates are, how to do an equivalent rate simulation and also some examples. Check out!

What this article covers:

What is Equivalent Rate Simulation?

Equivalent rates work as follows: We apply the rate to a value, which will show us the result of that same value in the desired period. They are present in financing, checks and also in loans.

When we take out a loan, the rates are usually shown on a monthly basis. But if you want to know what the annual fee is? Then we can do an equivalent rate simulation and then we’ll see how this monthly rate equals annually.

Source/Playback: original

However, the calculations apply only to compound interest, interest that increases over time. The calculation does not apply to simple interest, applied only to the initial capital.

But how to make an equivalent rate simulation? Now let’s see how this calculation works in practice.

Equivalent rate simulation calculator.

To make this calculation, we can use the equivalent rate simulation calculator, made especially for these calculations. We start by inserting the rate we want to convert, then insert the period to which the rate corresponds and finally enter the period you want to convert the rate.

It is essential that the bimonthly terms are converted to semiannual terms, as this is the only way to make the calculation. If the rate in question is semiannual, put 6 months in the calculator instead of 1 semester.

This calculator can be used to calculate any type of equivalent rate, whether for a loan or investment, it will work the same as long as it is used correctly.

Examples of Equivalent Rate

Let’s see in practice how an equivalent rate simulation works to make it even clearer. Let’s convert a rate of 0.68% per month, enter the rate into the equivalent rate calculator, and see how much it equals annually. The monthly rate of 0.68% equals 7.44% annually.

Examples of Equivalent Rate

Source/Playback: original

These rates correspond to the same amount, but in different periods. A rate of 12% per year, for example, will correspond to 0.95% monthly. It’s a very simple calculation, but it can be very useful.

But we know that equivalent rates are not the only types of interest on the market, let’s see some.

Types of Fees

One of the most common is the simple interest, defined under the initial capital entered, and does not suffer any type of alteration. That is, if a loan of R$ 1,000 is made with a rate of 2% per month, this amount will remain until the end of the contract, as it cannot be changed in any way.

Nominal interest rates are also very common and are present in most loan agreements and etc. These rates are equivalent to a period of 1 year, and may change depending on inflation.

Gross interest rates, on the other hand, are the result of an investment without any kind of interference, whether from inflation or taxes.

Now that it is clear how to simulate the equivalent rate, it is possible to make a calculation and find out how much the rate you pay monthly is equivalent to 1 year, with a very simple calculation.

Must Read