topic 4 Interest rate

topic 4 Interest rate - INTEREST RATE Learning Objective...

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

View Full Document Right Arrow Icon
Learning Objective Understanding the Interest rate quotes and Adjustment Application of Interest rate in computing Loan Payments Studying the determinants of interest INTEREST RATE
Background image of page 1

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

View Full DocumentRight Arrow Icon
Prescribe book Berk,J. ,Demarzo,P. and Harford,J.,2009, Fundamentals of Corporate Finance , Pearson Education, Chapter 5.
Background image of page 2
The effective annual rate The effective annual rate (EAR) or annual percentage yield (APY) indicates the total amount of interest that will be earned at the end of one year. Example 1: if EAR = 5%, a $100 investment will be: After 1 year? After 2 year?
Background image of page 3

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

View Full DocumentRight Arrow Icon
Adjusting the discount rate to different time periods Recall example 1: if the period is shorter than one year, what is the equivalent interest rate? Calculate it based on the interest rate factor (1+r) to the appropriate fractional power. Earning 5% interest in one year is equivalent to receiving for each $1 invested every six months. The equivalent interest rate of 5% annually for semiannually is 2.47% 0247 . 1 $ %) 5 1 ( 5 . 0 = +
Background image of page 4
Adjusting the discount rate to different time periods Equivalent n-period discount rate = n can be >1 (to compute a rate over more than one period) or <1 (to compute a rate over a fraction of a period) When computing present or future value, you should adjust the discount rate to match the time period of the cash flows. 1 ) 1 ( - + n r
Background image of page 5

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

View Full DocumentRight Arrow Icon
time periods Example: Suppose your bank account pays interest monthly with an effective annual rate of 6%. What amount of interest will you earn each month? If you have no money in the bank today, how
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/17/2011 for the course B.A 13 taught by Professor Cr during the Spring '11 term at Haverford.

Page1 / 19

topic 4 Interest rate - INTEREST RATE Learning Objective...

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

View Full Document Right Arrow Icon
Ask a homework question - tutors are online