Fina 3332 exam 2
interest rate
set by market forces, in particular the suppmy and demand of funds
Effective Annual Rate (EAR)
the total amount of interest that will be earned at the end of one year
Discount Rate Formula
1/(1+r)^t
Annual Percentage Rate (APR)
cost of credit expressed as a yearly percentage
Effective annual rate formula
(1+APR/m)^m-1 = 1+EAR
If given APR,
EAR increases with compounding frequency
Outstanding balance of a loan is equal to the present value of loan cash
flows,
when evaluated using the actual interest rate per payment interval based
on loan rate
Amortised Loan
a loan in which the borrower pays interest and principal over time
What is the difference between EAR and APR?
APR-simple interest
, EAR-compound interest is taken into account
quoted interest rate are nominal interest rates
which indicate rate of growth of money invested
nominal interest rates tend to be high when inflation is high,
as well as low when inflation is low
Higher interest rates tend to reduce,
attractiveness of typical investment projects
Fed Reserve raises Interest rates to
moderate investment and combat inflation and lowers Interest to
stimulate investment and growth
Interest rates differ with investment horizon according to
term structure of interest rates
yield curve
a graph showing the relationship between bond yields and maturities
Opportunity costs of capital
best available expected return offered in market on an investment of
comparable risk and term to cash flow being discounted
Why does the part of your loan payment covering interest change over
time?
interest rates are calculated based on your loan balance, not your
monthly payment
interest rate
set by market forces, in particular the suppmy and demand of funds
Effective Annual Rate (EAR)
the total amount of interest that will be earned at the end of one year
Discount Rate Formula
1/(1+r)^t
Annual Percentage Rate (APR)
cost of credit expressed as a yearly percentage
Effective annual rate formula
(1+APR/m)^m-1 = 1+EAR
If given APR,
EAR increases with compounding frequency
Outstanding balance of a loan is equal to the present value of loan cash
flows,
when evaluated using the actual interest rate per payment interval based
on loan rate
Amortised Loan
a loan in which the borrower pays interest and principal over time
What is the difference between EAR and APR?
APR-simple interest
, EAR-compound interest is taken into account
quoted interest rate are nominal interest rates
which indicate rate of growth of money invested
nominal interest rates tend to be high when inflation is high,
as well as low when inflation is low
Higher interest rates tend to reduce,
attractiveness of typical investment projects
Fed Reserve raises Interest rates to
moderate investment and combat inflation and lowers Interest to
stimulate investment and growth
Interest rates differ with investment horizon according to
term structure of interest rates
yield curve
a graph showing the relationship between bond yields and maturities
Opportunity costs of capital
best available expected return offered in market on an investment of
comparable risk and term to cash flow being discounted
Why does the part of your loan payment covering interest change over
time?
interest rates are calculated based on your loan balance, not your
monthly payment
