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# 2-25-08 - Compounding monthly 12 12 = 1 Given a monthly...

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2/25/2008 Bus 170 Note CH4 FV = pv * (1+r)^t PV = fv / (1+r)^t DF = 1 / (1+r)^t PV = C1 / (1+r) + C2 / (1+r) +……. PV of perpetuity = C / r Annuity PV of Annuity = 1/r – 1 / r(1-r)^t FV of annuity = C * PVAF 1 + real rat of interest = 1 + nominal rate / 1 + inflation rate Real rate of int ~ nominal rate – inflation rate EAR – Effective Annual Interest Rate - interest rate annualized using compound interest - EAR = (1+(r/t))^t -1 Ex: r = 12% annual APR (Annual Percentage Rate)

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Unformatted text preview: Compounding monthly 12% / 12 = 1% Given a monthly rate of 1%, what is the E.A.R.? Answer: (1+.01)^12-1 = 12.68% Example: r = 10% For 3 years DF = 1 / (1+r)^t DF = 1 / (1+.1)^3 DF = 0.75 And solve for the value today of a \$500 future payment? PV = fv / (1+r)^t PV = 500 / (1+.1)^3 PV = 375.66 If compounded semi-annually PV = fv / (1+r)^t PV = 500 / (1+.1/2)^6 PV = 373.11 Exam 1 75% is on CH3, 4 10% on CH1,2 15% on CH17...
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