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FINA4920-chap06

# FINA4920-chap06 - PrinciplesofFinance withExcelChapter6...

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Click to edit Master subtitle style  6/6/11 Principles of Finance  with Excel – Chapter 6 FINA 4920 Computers in Finance

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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  aren’t matched Lease vs. purchase Continuous compounding
6/6/11 Effective Rate 33 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)

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6/6/11  Interest rate vs. “all in cost” The text refers to EAR/AER as EAIR  Don’t worry about terminology, just look out for the word  effective I will label given rates as APRs on tests or assignments, and if I  don’t 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 –  Example

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FINA4920-chap06 - PrinciplesofFinance withExcelChapter6...

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