IEM3503_Ch2 Slides (Part 3)

IEM3503_Ch2 Slides (Part 3) - IEM 3503 engineering Economic...

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IEM 3503 engineering Economic Analysis Chapter 2, section 5
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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
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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.
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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
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IEM3503_Ch2 Slides (Part 3) - IEM 3503 engineering Economic...

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