Summary Theory of Interest 152 study guide

, U S




KE ALL AMOUNTS BACK TO THE SAME
POINT IN TIME



1 . Z
NOMINAL AND EFFECTIVE INTEREST RATES :

INTEREST CONCEPTS SIMPLE AND COMPOUND INTEREST :
, i




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BASIC CONCEPTS
i x Y
:
Principle amount

S :
Accumulated amount or
·
OM
inter
:
i Effective annual interest rate .

im :
Nominal annual interest rate .
m
, months

&
1


ACCUMULATED
. 3

AMOUNTS
,
PRESENT VALUES AND RELATED QUANTITIES 0 & months


·
11 months

SIMPLE INTEREST


S =
in


Interest in n
years :
..
xi"yi2i5
Sin

CORRESPONDING NOMINAL AND EFFECTIVE INTEREST RATES :




COMPOUND INTEREST : imm
Sin left m
S D 3 C
i m




Si
·




*
used todenote ing fac tor in
M


im
m



·
M m
Discount


CONTINUOS COMPOUNDING
quoted


Interest
paid in advance is
i s
as a rate
· m becomes infinitely large
I" becomes r
u D
S
p
.
u . pa

Mr

· S 2
~
EULCRS CONSTANT
i p . u .
pa



Find r with - ·
D
or i
S
S
i : 00


= UTURE VALUE S PRESENT VALUE
ex DISCOUNT D




?
yearly I that bank ear ned on bill




O




M




r