MAF101 Lecture Notes - Lecture 2: Interest
14 Aug 2018
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Future value : the amount as of any future any time. We prefer money received present over future value (due to inflation ). *time value of money is measured by interest rate. *time series - same observation across years (price of money is the interest rate) *cross sectional same year how much performance has been achieved (price of money is the fx change) Interest rate always expressed as percentage per annum (% per annum) ($)interest amount = principal x interest rate x interest period duration. *every time you calculate the total you need to add the principal to the calculated interest. *no change to the principal across the life of borrowing/lending. *usually on short term borrowing/lending (within 1 year/12months) *there will be (cid:862)interest on interest(cid:863) (t)-duration (usually years) (i)-interest rate per annum (p. a) (m)-number of compounding periods per year (n)-time period when interest is accrued into principal compound interest (r)-interest rate per interest interval.
