This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: Primbs/Investment Science 1 Lecture 1: Interest Lecture 1: Interest Reading: Luenberger Chapter 2, Section 1. Primbs/Investment Science 2 Interest Interest Principal and Interest Simple Interest Compound Interest Effective Interest Rate Primbs/Investment Science 3 Principal and Interest • Principal: Amount invested • Interest: “Rent” paid on investment • Example: You invest $1 for 1 year at 8%. After 1 year you receive $1.08. $1.08 = $1.00 + $0.08 principal interest Primbs/Investment Science 4 Principal and Interest • In general, if – A : Principal – r : interest rate per period • After 1 period, you receive – A(1+r) A A(1+r) time 1 Primbs/Investment Science 5 Principal and Interest • Interest over multiple periods depends on the compounding rule used. • Two Rules – Simple – Compound A ??? time 10 Primbs/Investment Science 6 Interest Interest Principal and Interest Simple Interest Compound Interest Effective Interest Rate Primbs/Investment Science 7 Simple Interest • Simple Interest – Interest is proportional to the time invested. Time: 1 2 n Value: A A+Ar=A(1+r) A+A(2r)=A(1+2r) A(1+nr) Simple interest is not used often in practice. A A(1+r) time 1 A(1+nr) n Money grows linearly Primbs/Investment Science 8 Example • What amount will be owed in 5 years if $5000 is borrowed now at 10% per year simple interest? 7500 $ )) 5 ( 1 . 1 ( 5000 $ )) ( 1 ( = + = + = time r A V Let V = Final value, A = Principal, r = interest rate: Primbs/Investment Science 9 Interest Interest Principal and Interest Simple Interest Compound Interest Effective Interest Rate Primbs/Investment Science 10 Compound Interest • Compound Interest...
View
Full
Document
This note was uploaded on 11/15/2008 for the course MS&E 242 taught by Professor Primbs during the Fall '06 term at Stanford.
 Fall '06
 PRIMBS

Click to edit the document details