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Interest Rates
Learning Objectives
1. Discuss how interest rates are quoted, and compute the effective
annual rate (EAR) on a loan or investment.
2. Apply the TVM equations by accounting for the compounding periods
per year.
3. Set up monthly amortization tables for consumer loans, and
illustrate the payment changes as the compounding or annuity
period changes.
4. Explain the real rate of interest and the effect of inflation on nominal
interest rates.
5. Summarize the two major premiums that differentiate interest rates:
the default premium and the maturity premium.
6. Amaze your family and friends with your knowledge of interest rate
history.
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APR
EAR 1
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Copyright 2010 Pearson Prentice Hall. All rights reserved.
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With monthly
deposits:
(Using the APR as the interest rate)
FV = $2,000,000;
N = 40 years;
I/Y = APR = 12%;
PV = 0;
C/Y=1;
P/Y=1;
PMT = $2,607.25
FV = $2,000,000;
N = 12*40=480;
I/Y = APR = 12%;
PV = 0;
C/Y = 12
P/Y = 12
PMT = $169.99
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Rates
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APR
EAR 1
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