Question

The time period after which the interest is added each time to form a new principal is called the __________

Answer 1

The explanation for the conversion period:

1. The interest period or conversion period is the time between successive conversions of interest into principal and is commonly three months, six months, or one year, where such case interest is compounded quarterly, semiannually, or annually, respectively.

Examples:

The formula for determining compound interest is : $\mathrm{A}=\mathrm{P}{(1+\frac{\mathrm{r}}{100})}^{\mathrm{n}}---\left(1\right)$

Compound Interest $=\mathrm{A}-\mathrm{P}$

$\mathrm{A}=$ Amount at end of n years

$\mathrm{P}=$ Sum invested for n years

$\mathrm{r}=$ the annual rate of interest compounded annually

1. If the interest is compounded quarterly the equation gets modified accordingly.
2. Effective rate of interest $=\frac{r}{4}$
3. Conversion period = $4\mathrm{n}$
4. If n = number of years then the conversion period will be based on the frequency of compounding. If the interest is compounded quarterly i.e. every three months (4 times a year), the conversion period becomes 4 × ‘n’ = 4n
5. If interest is compounded monthly then the conversion period will be 12n. The rate of interest will accordingly change.
6. If the interest is compounded daily then the conversion period will be 365n and the applicable rate of interest will daily rate of interest.

Hence The time period after which the interest is added each time to form a new principal is called the conversion period.