Chapter5 - FIN3100 Chapter 5 Interest Rates Learning...

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FIN3100: Chapter 5 Interest Rates
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Learning Objectives Discuss how interest rates are quoted and compute the effective annual rate (EAR) on a loan or investment. Correctly account for the compounding periods per year. Explain the real rate of interest and the effect of inflation on nominal interest rates. Consider the history of interest rates in the United States.
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Annual Percentage Rate (APR) This is the annual rate that is quoted by law By definition APR = period rate times the number of periods per year Consequently, to get the period rate we rearrange the APR equation: Period rate = APR / number of periods per year
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Effective Annual Rate (EAR) This is the actual rate paid (or received) after accounting for compounding that occurs during the year, where m is the number of compounding periods per year. If you want to compare two alternative investments with different compounding periods you need to compute the EAR and use that for comparison.
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Make Sure Things Match Up
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