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 onearned 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 = $20Required 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.