From the question r nominal interest rate 5 m number of compounding periods 12

From the question r nominal interest rate 5 m number

This preview shows page 4 - 7 out of 10 pages.

From the question: r = nominal interest rate = 5% m = number of compounding periods = 12 (compounded monthly) i = effective interest rate = 5% / 12 = 0.41% per month 4 IE 492 Engineering Economics Karnik
Image of page 4

Subscribe to view the full document.

INTEREST PERIODS AND PAYMENT PERIODS There can be three types of situations related to interest periods and payments periods. Each of these situations requires a different approach. 5 Situation Meaning Approach Interest periods coincide with payment period Number of compounding periods equal payment periods Direct use of compound interest formulas is possible (formulas from chapter 2) Interest periods are smaller than payment periods Number of compounding periods is higher than payment periods Determine effective interest rate for each compounding period and treat each payment separately Interest periods are larger than payment periods Number of compounding periods is lower than payment periods See next slides for detailed approach IE 492 Engineering Economics Karnik
Image of page 5
INTEREST PERIODS COINCIDE WITH PAYMENT PERIOD When interest payments coincide with the payment periods the compound interest formula we saw earlier can be used, but with a small change described below. Example: Consider interest rate factor (F/P,i%,n) where n is the number of years or investment period or payment period. However we will make the following amendment to the interest rate factor to indicate both interest period and the payment period. (F/P,i%,n) will become (F/P,i%,m*n).
Image of page 6

Subscribe to view the full document.

Image of page 7
  • Summer '16

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask You can ask ( soon) You can ask (will expire )
Answers in as fast as 15 minutes