ECO 1192 Chapter Notes - Chapter 2: Effective Interest Rate, Nominal Interest Rate, Interest
25 Sep 2017
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Interest is the difference b/w the amount of money lent and the amount of money later repaid. It is the compensation for giving up the use of the money for the duration of the loan. The value of interest depends on the interest rate and the time period. Compounding interest assumes that there are n sequential one-period loans. At the end of the first interest period the borrower owes p(1+i). This is the amount borrowed for the second period. Interest that is only charged on the initial amount is simple interest. As the number of periods increase so does the gap between simple and compound interest. Nominal interest rate is calculated by multiplying the interest rate per compounding period by the number of compounding periods per year. Is = r/m
