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From: jmsellens@watmath.UUCP (John M Sellens)
Newsgroups: can.general
Subject: Re: Canadian vs American Mortgage Calculation
Message-ID: <9752@watmath.UUCP>
Date: Wed, 7-Nov-84 20:26:54 EST
Article-I.D.: watmath.9752
Posted: Wed Nov  7 20:26:54 1984
Date-Received: Fri, 9-Nov-84 05:15:52 EST
References: <183@utcs.UUCP>, <9751@watmath.UUCP>
Organization: U of Waterloo, Ontario
Lines: 28

Well, maybe I can clarify Kevin's comments a little bit.

The compounding period and the frequency of the payments do not necessarily
coincide.  For example, most mortgages are paid monthly, but the interest
is compounded semi-annually.

Using Kevin's example of a 12% nominal annual rate, the monthly rate when
interest is compounded monthly is 1% (12% divided by 12 months).  If
compounded annually, the monthly rate is 0.95% (the twelfth root of
1.12 minus 1).  If the interest was compounded semi-annually, the monthly
rate is the sixth root (since there are 6 months or periods in the
compounding period) of 1 plus half of the nominal annual rate (since there
are two compouding periods in a year) minus 1
  0.98% = sixth root of 1.06 - 1

Now - the original question - the difference between the Canadian and
American methods.  The Americans generally treat things as if each month
had 30 days, and each year has 12 months of 30 days each for a total of
360 days.  Canadians take a more realistic view of things.

Now, depending on how you calculate things, this may or may not affect
your results.

Remember that the important thing is always the effective annual rate - the
more frequently the interest is compounded, the higher the effective annual
rate (for a given nominal annual rate).

John