{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Class 6 and 7 Before

O then o and the ear r yr that corresponds to a

Info icon This preview shows pages 6–15. Sign up to view the full content.

View Full Document Right Arrow Icon
O Then O And the EAR r Yr that corresponds to a continuously compounded interest rate i cont is given by:
Image of page 6

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
7 Example: Continuous Compounding O What is the effective annual rate of return for a nominal rate of 12% compounded continuously?
Image of page 7
8 Here We Go Again ( ) ( ) ( ) ( ) ( ) Yr i Yr daily i Yr mo i Yr Q i Yr semi i r e r r r r r r r r cont daily mo Q semi + = + = + = + + = + = + + = + = + + = + = + 1 1 1 1 1 ) 1 ( 1 1 ) 1 ( 1 1 ) 1 ( 1 365 365 365 12 12 12 4 4 4 2 2 2
Image of page 8

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
9 A Picture Says More O This picture shows the effective annual interest rates (y-axis) for a nominal interest rate of 12% as a function of the number of compounding periods per year (x-axis). EAR 12.00% 12.75% 1 365 Compounding periods per year 2 12.36% 4 12.55%
Image of page 9
10 Continuous Compounding for more than one Year O A firm borrows $1,300 at a continuously compounded interest rate i = 8%. The firm repays the loan after 3 years. How much does the firm have to pay at the end of 3 years? O We are looking for FV 3 . After one year: After two years: After three years: O So in our case:
Image of page 10

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
11 Alternatively O A firm borrows $1,300 at a continuously compounded interest rate i = 8%. The firm repays the loan after 3 years. How much does the firm have to pay at the end of 3 years? O We are looking for FV 3 .
Image of page 11
Annuities 12
Image of page 12

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
13 Annuities O An annuity is a series of level cash flows that occur at the end of each period for a finite number of periods. – Important: O The present value of an annuity is the amount of money you would need today to duplicate the cash flows associated with the annuity (for a given interest rate).
Image of page 13
14 Annuities and the Timeline O An annuity is a series of level payments/cash flows that occur at the end of each period for a finite number of periods.
Image of page 14

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 15
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

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