Interest Rates Flashcards
(18 cards)
What are the three main ways interest rates are quoted?
Equivalent n-period discount rate
Effective Annual Rate (EAR)
Annual Percentage Rate (APR)
What does the Effective Annual Rate (EAR) represent?
The total interest earned in one year, considering compounding.
How is EAR calculated from APR?
EAR=(1+ APR/m) ^m −1
Why do we adjust discount rates for time periods?
To ensure the discount rate matches the cash flow period (e.g., monthly, yearly).
How is the Equivalent n-Period Discount Rate calculated?
EquivalentRate=(1+r) ^n−1
Where r is the annual rate, and n is the number of periods.
What is the main feature of APR?
APR does not include compounding—it shows the simple interest earned in one year.
How do you find the rate per compounding period from APR?
Rateperperiod= APR/m
Where m = number of periods per year.
How much must be saved monthly to reach $100,000 in 10 years at 6% EAR?
$615.47 per month.
How to calculate monthly cash flows
By converting EAR to a monthly rate (0.4868%) and using the Future Value of Annuity formula.
What is an amortizing loan?
A loan repaid in regular payments that include both interest and principal.
How are monthly loan payments calculated?
C= PV/((1-1)/(1+r)^n)xr
If you borrow $30,000 for 60 months at 6.75% APR (monthly compounding), what is the monthly payment?
$590.08.
How to calculate remaining loan balance after some payments?
Use the PV of the remaining annuity payments formula.
Example: After 36 months on a $30,000 loan (6.75% APR), how much remains?
$13,222.32.
What factors determine interest rates?
r = risk freerate + inflation premium + risk premium
What is the difference between real and nominal rates?
Nominal rate: Growth of money without adjusting for inflation.
Real rate: Growth of purchasing power (inflation-adjusted).
What is the Fisher Equation?
1+rn=(1+rr)(1+π)
rn = nominal rate, rr is real rate and pi is inflation rate
If nominal rate = 5.1% and inflation = 2.7%, what is the real rate?
2.34%.
