Chapter 1 Lecture 04

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Lecture 4 Nominal Rates of Interest and Discount Textbook Reference: Section 1.7 Learning Objectives I Define Nominal Rates of Interest and Discount I Understand accumulation using nominal rates and calculate Present and Future Values I Convert between both nominal/effective rates and interest/discount
Review 1 PV X Vit X I 2 Effective rate of discount du ath ath 1 Disconne amount ahh Balance at the end In the compound world Equivalent rates d it v i d discount factor
Nominal rate of interest I Refers to a rate of interest that has been annualized without taking compounding into account. I Interest of 4% per 0.5 year is expressed as an annual rate of 8%. But it is equivalent to ( 1 + 4 %)( 1 + 4 %) - 1 = 8 . 16 % I In this case, we say: 8% is the annual nominal rate of interest convertible (or payable, or compounded) semi-annually I notation: i ( 2 ) = 0 . 08 () i ( 2 ) 2 per 1 2 year effective () 1 + i ( 2 ) 2 2 - 1 per year effective am m fEteantr ti GET TECHE I
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