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Unformatted text preview: Click to edit Master subtitle style 6/6/11 Principles of Finance with Excel Chapter 6 FINA 4920 Computers in Finance 6/6/11 Chapter 6: What does it cost? Chapter menu:  Making interest rates comparable Including loan fees into calculation Comparing financing costs with IRR Effective rates All-in interest rate Used when comparing alternatives Used when compounding period and payment frequency arent matched  Lease vs. purchase 6/6/11 Effective Rate  Recall that stated rates may not always be what you end up earning or paying  APR = periodic rate times # of compounding periods per year APR = r*m Periodic rate = r = APR/m  EAR = the actual rate paid (or received) after accounting for compounding that occurs during the year EAR = (3 ways, I and II are essentially identical) 6/6/11 Interest rate vs. all in cost  The text refers to EAR/AER as EAIR Dont worry about terminology, just look out for the word effective I will label given rates as APRs on tests or assignments, and if I dont explicitly label them, just assume APR  The effective annual rate calculation incorporates fees and compounding into the calculation Use effective rates when: Comparing investments Fees need to be taken into account Compounding needs to be taken into account For annual compounding, EAIR = APR = IRR Track actual loan cash flows for the computation of effective rate 6/6/11 Effective Rate and Fees  When fees are included, we have to make adjustments  Two alternatives for a one-year loan:...
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This note was uploaded on 06/06/2011 for the course STAT 4290 taught by Professor Lazar during the Spring '11 term at University of Georgia Athens.

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FINA4920-chap06 - Click to edit Master subtitle style...

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