I'm trying to create a certificate of deposit (CD) comparison tool and have been working on a formula to compare a CD with a higher interest rate to a CD I might own with a penalty period. I believe the basic formula idea:
- FVc = Future Value of current CD
- CVc = Current Value of current CD (Today's value with penalty)
- rn = The new CD's APR
- npern = The new CD's compounding frequency
- nm - nt = Periods till maturity minus periods passed as of today. (The number of periods left till maturity)
This formula simplifies to:
- rn/rc= The new/current APR
- npern/nperc = The new/current compounding frequency
- nm - nt + np = The periods till maturity minus the periods passed today plus the penalty periods of the current CD.
- nm - nt = The periods till maturity minus the periods passed today of the new CD.
My question is this: This looks suspiciously close to the formula for compounding basis conversion formula at Wikipedia and copied below. Can anyone help me understand the relationship between these two calculations? Additionally, is my formulation correct?
To convert an interest rate from one compounding basis to another compounding basis, the following formula applies:
where r1 is the stated interest rate with compounding frequency n1 and r2 is the stated interest rate with compounding frequency n2.