# 4.7 - 1 TIME VALUE OF MONEY ANNUAL(NOMINAL& EFFECTIVE...

This preview shows pages 1–7. Sign up to view the full content.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 1 TIME VALUE OF MONEY ANNUAL (NOMINAL) & EFFECTIVE INTEREST RATES 2 Annual Percentage Rate (“APR”) ❚ The annual rate that is quoted by law ❚ Often referred to as the “NOMINAL RATE” ❚ APR = period rate X # of periods per year ❚ Period rate = APR / # of periods per year 3 Computing APRs (Q) ❚ What is the APR if the monthly rate is .5%? ❚ What is the APR if the semiannual rate is 2.0%? ❚ What is the monthly rate if the APR is 12% with monthly compounding? 4 Computing APRs (A) ❚ What is the APR if the monthly rate is .5%? ❚ 0.5(12) = 6% ❚ What is the APR if the semiannual rate is 2.0%? ❚ 2.0(2) = 4% ❚ What is the monthly rate if the APR is 12% with monthly compounding? ❚ 12 / 12 = 1% 5 Effective Annual Rate (“EAR”) ❚ This is the actual rate paid (or received) after accounting for compounding that occurs during the year ❚ If you want to compare two alternative investments with different compounding periods, you need to compute the EAR for both investments and then compare the EAR’s. 6 APRs & EARs (Q -1) ❚ Suppose you can earn 1% per month on \$1 invested today....
View Full Document

{[ snackBarMessage ]}

### Page1 / 23

4.7 - 1 TIME VALUE OF MONEY ANNUAL(NOMINAL& EFFECTIVE...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online