# 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