英文版--financech4研讨.pptVIP

Outline Dealing with periods other than years Understanding interest rate quotes and conversions Applications – mortgages, etc. I. Dealing with periods other than years Definition: Effective interest rates are returns with interest compounded once over the period of quotation. Examples: 10% per year compounded yearly 0.5% per month compounded monthly PV and FV Calculations for a single cash flow As long as you have an effective interest rate there is only one thing to ensure: set the number of periods for PV or FV calculation in the same units as the effective rate’s period of quotation. Examples You expect to receive $50,000 in 90 days. What is the PV if your relevant opportunity cost of capital is an effective rate of 6% per year? Note if the you are told it is an effective rate of 6% per year, then this implies 6% per year compounded yearly. You have just invested $100,000 and expect your return to be 4% per quarter compounded quarterly. How much do you expect to accumulate after 5 years? Annuities and perpetuities The annuity and perpetuity formulae require the rate used to be an effective rate and, in particular, the effective rate must be quoted over the same time period as the time between cash flows. In effect: If cash flows are yearly, use an effective rate per year If cash flows are monthly, use an effective rate per month If cash flows are every 14 days, use an effective rate per 14 days If cash flows are daily, use an effective rate per day If cash flows are every 5 years, use an effective rate per 5 years. Etc. Example You are obtaining a car loan from your bank and the loan will be repaid in 5 years of monthly payments beginning in one month. The amount borrowed is $20,000. Given the rate that the bank quoted, you have determined the effective monthly interest rate to be 0.75%. What are your monthly payments? II. Understanding Interest Rate Quotes and Conversions The TVM formulae we have used all require rates that are effective. Unfortunately, r