BBG 101 Lecture 7: BBG_101_-_Lecture_7
13 Aug 2020
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Fv = pv (1+i 1) (1+i 1) (1+i 1) N = the number of compounding periods. Pv = the original principal i = the per period interest rate. Rearranging the future value formula gives the formula for the present value. Pv = fv (1 + i)n. Interest rates are typically quoted as per annum. However, the compounding frequency is not always annual. A nominal rate is compounded more frequently than once-a-year. A 18% p. a. compounded semi-annually rate is not identical to a 18% p. a. interest rate. The former is compounded two times at 9% The latter is compounded once at 18% An effective rate is an interest rate with annual compounding. To convert a nominal rate to an effective rate. Ear = (1 + i)m - 1. M = number of compounding periods per year i = interest rate per period. Pv = fv / (1 + i)n or pv = fv (1 + i)-n.
