Lecture04extra_winter09

# Lecture04extra_winter09 - APR and Present Value of Cash...

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APR and Present Value of Cash Flows

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An APR is an annual discount rate that computes the income you will earn over a year. In that year you will earn several interest payments but you do not re-invest them.
The APR will provide you with 2 pieces of information: The Annual Interest Rate How many interest payments you are due every year (compounding periods) Example: The loan charges monthly payments with an APR of 12%

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The APR is not a correct measure of the annual return you earn (or have to pay) The correct annual return must include the compounding effect coming from all the intermediate interest happening inside the year.
The APR is only the correct measure of return for the compounding period expressed in the rate Example: An APR of 12% compounded monthly means that you earn 1% per month. You just need to divide the APR by the number of compounding periods.

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The true interest you earn after one year will be the compounded effect of the interest earned in
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## This note was uploaded on 01/28/2012 for the course ECON 134a taught by Professor Lim during the Winter '08 term at UCSB.

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Lecture04extra_winter09 - APR and Present Value of Cash...

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