BMGT 340 Chapter Notes - Chapter 5: Effective Interest Rate, Amortizing Loan, Nominal Interest Rate

• School: University of Maryland
• Department: Business and Management
• Course: BMGT 340
• Professor: Michael Padhi

Document Summary

Interest rate quotes and adjustments: effective annual rate. Total amount of interest that will be earned at the end of one year: adjusting the discount rate to different time periods. Equivalent n period discount rate = (1+r) ^ n - 1. When computing present or future values, you should adjust the discount rate to match the imte period of the cash flows: annual percentage rate. Amount of simple interest earned in one year. Amount of interest earned without compounding effect. If you have 6% apr with monthly compounding, you will earn. Therefore, your effective annual rate is (1+0. 005) ^ 12 = 6. 1678% ear per year. Apr cannot be used as a discount rate. Apr is how to compute actual interest earned in each compounding period. 1 + ear = ( 1 + apr/m) ^ m: m is number of compounding periods. Ear increases with frequency of compounding because of the ability to earn interest on interest sooner.