D076_Unit_3 - Interest Rate(Lesson 4.12 \u25cf Key Terms \u25cb Interest Rate The percentage of the principal that a lender charges a borrower for the use of

# D076_Unit_3 - Interest Rate(Lesson 4.12 u25cf Key Terms...

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Interest Rate (Lesson 4.12) Key Terms: Interest Rate - The percentage of the principal that a lender charges a borrower for the use of assets. Is often paid in cash, but can also be paid in vehicles, buildings, or consumer goods. Generally expressed on an annual basis, known as Annual Percentage Rate (APR) - The annual interest rate that is charged for borrowing money or that is earned through investment. Hurdle Rate - It is the minimum rate that a firm must surpass to accept a project. Discount Rate - The name for interest rate when used in time value of money calculations. Cost of Capital - The cost to a firm to use an investor’s capital; see interest rate. Types of interest: Simple Interest - The interest earned only on the principal Annual Interest = Principal x Interest Rate Use the following calculation to find the total interest amount using interest for t years: Total Interest = Annual Interest x t Compounding Interest - The interest on the principal plus the interest on earned interest. Total Interest = Principal x (1 + Interest Rate)^number of periods - Principal Example: \$100 Deposit 10% Annual Interest Money is kept for two years in the account Interest = \$100 (1+0.10)^2 =\$10 Annual Interest = \$100 x 0.10 = \$10 Total Interest = \$10 x 2 = \$20 Required Return (Lesson 4.13) Key Terms: Required Rate of Return - Is the rate of return or compensation that an investor or a lender will accept for investments such as stocks, bonds, or loans. Components of Required Rate of Return: Opportunity Cost - The loss of potential gain from other alternatives when one alternative is chosen. Risk - The possibility that the realized or actual return will differ from the expected return. Inflation - Rate at which the average price level of goods and
services in an economy increases over a period of time. Inflation (Lesson 4.14) Notes/Vocab: Inflation - Rise in price over time. How Inflation Happens: 3 main sources: Increased demand for goods and services - Supply is not sufficient to meet the demand. Therefore, demand for goods and services pushes prices up to the level where the supply and demand are balanced out. Rising costs - Increase due to regulations, accidents, high demand. Cost of production increases, then suppliers must increase the prices of their goods and services to maintain the financial health of their company.
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