ECON 106F Lecture Notes - Lecture 5: Federal Funds Rate, Cash Flow, Credit Score In The United States
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Indicates the total amount of interest that will be earned at the end of one year. It is also referred to as the effective annual yield (eay) or annual percentage yield (apy) You want to know what ear is to determine what you are going to earn on your money by the end of the year (depending on compounding) It is effective because it really depends on how it is compounding. Because of compounding, earning a 5% return annually is not the same as o earning 2. 5% every 6 months o o o. Example: if we want to find the half year rate using the rate of 5%: (1. 05)0. 5 -1 = . 0247= 2. 47% for 6 months. Your bank account pays interest monthly with an ear of 6%- what amount of interest do you earn per month? (1. 06)1/12 - 1 = . 4868% per month. Fv (annuity)= c * (1/r) * [(1+r)n - 1]
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