CCT321H5 Lecture Notes - Lecture 4: Effective Interest Rate, Annual Percentage Rate, Annual Percentage Yield
11 May 2020
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If you want to compare two alternative investments with different compounding periods, you need to compute the ear for both investments and then compare the ear"s. Valuing monthly cash flows: problem: suppose your bank account pays interest monthly with an ear of 6%. Future values of saving annuities with different payment frequencies: problem: you want to save for a special vacation that you will take in 6 years. Given a rate of 6% per year with monthly compounding for your savings account at scotiabank, you wish to know what will be the future value of an annuity of deposits you will make to your account. This information will help you decide the best way to save. The vehicle is expected to last 3 years. You can buy the car for ,000 up front or you can lease it for ,800 per month for 36 months. The firm can borrow at an interest rate of 8% apr with quarterly compounding.
