But, before we begin, it is also important to use time value of money for less than one year.

Start with an annualized rate of 6%. Other descriptions include an effective annual yield (EAY), or an effective annual rate (EAR). So, the question becomes how to convert to annual rate to a periodic rate.

Let’s start with monthly:(1 + X)12 = (1.06) so X = [(1.06)1/12] –1So, X = 0.0048675, or 0.48675%, or 48.68 basis points per month.

Now, let’s figure out how much 100,000 is worth for one month at an annualized rate of 6%.100,000(1.0048675) =$100,486.75

What about 2 months?100,000(1.0048675)2 =$100,975.87Another, and easier way to do this is 100,000(1.06)(2/12) = =$100,975.87

So, in general, FV = PV(1+EAR)(h/n)

And, of course PV = FV/(1+EAR)(h/n)

Where h = # of periods and n = the # of total periods in a year

If the interest rate is a nominal rate, also referred to as a stated rate, you treat this differently:

Suppose we have a nominal rate of 6%, but paid monthly for the same $100,000. Then,FV = 100,000(1 + .06/12) = $100,500And for 2 months, 100,000(1.005)2 = 101,002.50.

Notice the difference compared to using an EAY or EAR is about $27 more interest for this example.