AC 3100
Nominal Vs Effective Rates
Net
UsableNote Payable #1
Funds$100 face valueEffective
T=0 10% nominal
T=1 interest
Rate (IRR)
Repay face value plus 10% interest (on face value) in 1 year
NOTE PAYABLE #1
Loan proceeds
Repay face value
Interest (100*10
INTEREST RATE CONCEPT ERRORS
SPICELAND ET AL, 8TH EDITION
CASH DISCOUNTS-PAGE 368
Spiceland et al calculate the APR, but incorrectly refer to it as the AER. Assuming a 360-day year, the
correct AER on terms 2/10, net 30 is: (1+2%/(1-2%)^(360/30)-1=43.84%.
Argument
Rate
Nper
Pmt
PV
FV
Type
*
Explanation
Interest rate for the period
Total number of pmt payment periods in an annuity, or number of periods until FV is due
Annuity payment
Single amount due today
Single amount due Nper in the future
Timing of Pmt
AC 3100-Chapter 6 Lecture Notes
Simple Interest:
I=PRT where P=Principal, R=Periodic Rate, T=Periods
Future value: FVsimple=P+PRT or P*(1+RT)
Borrowing at simple interest can be deceiving. See: APR AER on a Simple Interest Loan.xlxs
Compound Interest (usi
AC
AC 3100
3100
HP
HP 10
10 bII
bII Versus
Versus Excel
Excel
Excel
HP 10bII
NPER
RATE
PV
PMT
FV
TYPE*
N
I/YR
PV
PMT
FV
BEG/END
* 0=END
1=BEG
Adjustment for P/YR:
Your calculator divides the value of I/YR by the value
of P/YR which is preset to 12. The de
TIME VALUE OF MONEY ALGORITHM
USED BY EXCEL & FINANCIAL CALCULATORS
This is the algorithm behind Excels basic time value of money functions (financial
calculators also), such as FV, PV, PMT and RATE (under RATE, Excel replaces rate
iteratively using Newto
AC 3100
Formulas for Time Value of Money Factors
Future value of a single cash flow:
FV n:r = (1+r)n
Present value of a single cash flow:
PV n:r = 1/(1+r)n
Future value of an ordinary annuity:
FVOA n:r = [(1+r)n-1]/r
Future value of annuity due:
FVAD n:r