Quantitative Methods - Simple And Compound Interest Flashcards
What is simple interest?
Interest received each year would be based on the original capital invested only
What is another name for compound interest?
Effective annual rate
What is compound interest?
When interest earned each year becomes part of the sum which the interest from the next year multiplies
Interest is earned on the total value of the deposit at the start of the year
How do you compound interest?
The investment multiplied by the interest rate to the power of the time period
What does the dividend valuation model state?
The market value of a security is the present value of the future expected receipts, discounted at the investors’ required rate of return
Ho do you calculate flat rate compound interest?
Divide the annual rate by the number of periods interest is compounded. Then multiply the investment by the answer to the power of the number of time period
What is important about compounding flat rate interest?
The more frequent the compounding the better?
The higher the interest rate, the greater the benefit of frequent compounding
What is the annual percentage rate?
This is the rate which you will effectively be paid, or pay if borrowing over the course of the year!
When do banks and instant access building societies compound interest?
Banks usually compound monthly whilst building societie accounts often compound quarterly, though many or annually or semi annually
What is continuous compounding?
When interest is continuously compounded
