MAF101 Lecture Notes - Lecture 3: Financial Institution, Sinking Fund, Sole Proprietorship
Document Summary
Interest rate can be replaced by nick names e. g. return on similar investment, opportunity cost of funds etc. Simple interest = only apply if explicitly mentioned. Compound interest = default setting in finance. The rules of a(cid:374)(cid:374)uities: if you have : a regular payment e. g. annually, semi-annually, monthly etc, of the same amount, over a fixed (finite) time period. Then you have an annuity, and the annuity formula can be used: ordinary annuity = if the first payment occurs at the end of the first period. Mortgage repayments, wages: annuity due = if the payment occurs at the start of the first period. E. g: kate is entitled to a retirement income stream which pays her 30,000 per annum for 20 years. Assume the interest rate is 10% and the first payment is in one year. This value is the equivalent of earning 30,000 annually over the next 20 years at 10% per annum.
