Lecture 4: effective annual interest, annual percentage rate

0.0(0)
studied byStudied by 0 people
full-widthCall with Kai
GameKnowt Play
learnLearn
examPractice Test
spaced repetitionSpaced Repetition
heart puzzleMatch
flashcardsFlashcards
Card Sorting

1/5

encourage image

There's no tags or description

Looks like no tags are added yet.

Study Analytics
Name
Mastery
Learn
Test
Matching
Spaced

No study sessions yet.

6 Terms

1
New cards

What is annual percentage rate (APR)?

The annual interest rate without considering compounding

  • found by multiplying the per-period rate (r) by the number of periods in a year

2
New cards

What is effective annual rate (EAR)?

The interest rate annualized using compound interest

  • same result as r = APR/m compounded m times

<p>The interest rate annualized using compound interest</p><ul><li><p>same result as r = APR/m compounded m times</p></li></ul><p></p>
3
New cards

What is continuous compounding?

the general formula for the future value of an investment compounded continuously over many periods 

<p>the general formula for the future value of an investment compounded continuously over many periods&nbsp;</p>
4
New cards

How do you find the rate of a mortgage?

Mortgage rates in Canada use semi-annual compounding but interest is actually calculated/compounded monthly!

  1. Convert the APR to EAR

  2. Calculate the monthly rate by setting the answer of 1 = (1+r)^m - 1

<p>Mortgage rates in Canada use semi-annual compounding but interest is actually calculated/compounded monthly!</p><ol><li><p>Convert the APR to EAR</p></li><li><p>Calculate the monthly rate by setting the answer of 1 = (1+r)^m - 1</p></li></ol><p></p>
5
New cards

What is ammortization?

To kill

  • to extinguish the mortgage

6
New cards

How do you add cash flows?

Only is f the time of the cash flows are the same!

  • can’t add a cash flow at t=2 to a cash flow at t=3