S07 Chap 4-1

S07 Chap 4-1 - Rates Lecture No 4-1 Chapter 4 Contemporary...

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   Contemporary Engineering Economics, 4 th   edition, © 2007 Nominal and Effective Interest  Rates Lecture No. 4-1 Chapter 4 Contemporary Engineering Economics Copyright © 2006
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   Contemporary Engineering Economics, 4 th   edition, © 2007 Chapter Opening Story – Hybrid  Mortgages With hybrids, borrowers choose to accept a fixed interest rate over a number of years—usually 3,5,7 or 10 years—and afterward the loan converts to an adjustable-rate mortgages. Under what situation, would a homeowner benefit from a hybrid financing?
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   Contemporary Engineering Economics, 4 th   edition, © 2007 Understanding Money and Its  Management – Main Focus 1. If payments occur more frequently than annual, how do you calculate economic equivalence? 1. If interest period is other than annual, how do you calculate economic equivalence? 2. How are commercial loans structured? 3. How should you manage your debt ?
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   Contemporary Engineering Economics, 4 th   edition, © 2007 Nominal Versus Effective Interest  Rates Nominal Interest Rate : Interest rate quoted based on an annual period Effective Interest Rate : Actual interest earned or paid in a year or some other time period
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   Contemporary Engineering Economics, 4 th   edition, © 2007 Financial Jargon Nominal interest rate Annual percentage rate (APR) Interest period 18% Compounded Monthly
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 Contemporary Engineering Economics, 4 th   edition, © 2007 18%  Compounded  Monthly What It Really Means ? Interest rate per month ( i ) = 18%/12 = 1.5% Number of interest periods per year ( N ) = 12 In words , Bank will charge 1.5% interest each month on your unpaid balance, if you borrowed money. You will earn 1.5% interest each month on your
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S07 Chap 4-1 - Rates Lecture No 4-1 Chapter 4 Contemporary...

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