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Compare the two monthly numbers
At 6% EAR, the equivalent monthly effective rate is 1.06^(1/12) − 1, approximately 0.486755%. Dividing 6% by twelve gives 0.5%.
Rebuild each annual factor
| Monthly input | Annual result |
|---|---|
| 1.06^(1/12) − 1 | Exactly the 1.06 factor before rounding |
| 0.5% | 1.005¹² − 1 ≈ 6.1678% |
Identify when the division is appropriate
Dividing a nominal annual rate by its stated compounding frequency is part of that quotation convention. It is not the same operation as converting an effective annual factor to a monthly effective factor.
Attach the convention to the number
Write nominal or effective and the applicable interval beside the rate. A percentage without its convention can lead to a different result even when every subsequent arithmetic step is correct.