1-28 Notes BF - (See Chapter 6/2 #1) o You should NEVER...

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1/28/08 Business Finance Notes For interest, you need to find the Rate that corresponds to the period Effective Annual Rate (EAR) o This is the actual rate paid (or received) after accounting for compounding that occurs during the year o If you want to compare two alternative investments with different compounding periods, you need to compute the EAR and use that for comparison Annual Percentage Rate o This is the annual rate that is quoted by law o By definition, APR = period rate times the number of periods per year o Consequently, to get the period rate, we rearrange the APR equation Period rate= APR / number of periods per year How to find APRquarterly given APRmonthly
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Unformatted text preview: (See Chapter 6/2 #1) o You should NEVER divide the effective rate by the number of periods per year it will NOT give you the period rate. Things to remember o You ALWAYS need to make sure that the interest rate and the time period match If you are looking at annual periods, you need an annual rate If you are looking at monthly periods, you need a monthly rate o If you have an APR based on monthly compounding, you have to use monthly periods for lump sums, or adjust the interest rate appropriately if you have payments other than monthly EAR Formula o (see 6/2, #2, 3)\...
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This note was uploaded on 04/07/2008 for the course BA 3341 taught by Professor Polkovnichenko during the Spring '08 term at University of Texas at Dallas, Richardson.

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