Chapter 4 - Interest Rates

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6 Terms

1
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Effective rates

Interest paid once per measurement period.

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Nominal Rates

Paid more frequently than once per measurement period.

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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.

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Nominal rate of discount convertible pthly, d(p)

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

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Force of Interest

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

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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.