Chapter 4 - Interest Rates

Effective rates

Interest paid once per measurement period.

Nominal Rates

Paid more frequently than once per measurement period.

Nominal rate of interest convertible pthly, i^(p)

The total amount of interest rate that is paid in p equal instalments at the end of each pth subinterval.

Nominal rate of discount convertible pthly, d^(p)

Total amount of interest paid in p equal instalments at the start of each pth subinterval.

Force of Interest

The amount of interest paid that is paid continuously over a time period.

Applications of force of interest

• It remains the most fundamental measure of interest as all other interest rate can be derived from it.

• Remains a useful conceptual and analytical tool and can be used as an approximation to interest paid very frequently, e.g. daily.