This preview shows pages 1–5. Sign up to view the full content.
IEM 3503
engineering Economic Analysis
Chapter 2, section 5
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document Multiple Compounding Periods
Interest rates have been stated as annual rates
up until now.
for example 10% per year compounded annually
written symbolically, this is 10%/yr/yr or just 10%/yr
This means that both the interest period
(the 1
st
“yr”) and the compounding period
(the 2
nd
“yr”)
are annual.
What about situations when this is not the case?
commonly, the interest period is annual but the
compounding period is more frequently
such as monthly or quarterly or even daily
Basic Form
We must be precise when writing interest rates to reflect this
situation.
From this point forward, we will use the following notation:
r% / interest period / compounding period
r (rather than i) is commonly used to represent interest rates when the interest
period and compounding period are different
r is referred to as a nominal
interest rate
example: 12% per year compounded quarterly or 12%/yr/qtr
If the compounding period is omitted, it is assumed to be “yr”
Nominal interest rates are often misleading because they do
not reflect the actual compounding frequency of the interest.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document Basic Form
Very Important Formulations:
Interest rate per compounding period =
interest rate / compounding period / compounding period
Interest rate per desired period =
interest rate / desired period / desired period
Where: r = nominal interest rate, m = # of compounding periods in the r’s
interest period, L = # of compounding periods in the desired period
This is the end of the preview. Sign up
to
access the rest of the document.
This note was uploaded on 09/26/2011 for the course IEM 3503 taught by Professor Deyong during the Spring '07 term at Oklahoma State.
 Spring '07
 Deyong

Click to edit the document details