BU111 Lecture Notes - Lecture 29: Effective Interest Rate
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BU111 Full Course Notes
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Annuity that goes on forever (ex: dividend on a preferred share) Payment and interest periods are not always the same. Always multiply n (number of years) by number of payments per year n must always represent the number of payments you give/receive over the time of the investment period. Adjust compounding rate to match payment frequency (r must match n) this is your new. If payment and interest periods are the same, but more than once per year (or single payment but compounding more than once a year), divide r by the number of payments per year. Payments per year = 2 n = 4*2 = 8 r = 0. 03/2 = 0. 015. M = # of compounding periods per year p = payment period measured in fractions of a year. Example: what is the fv of received monthly for 3 years and compounding at 5% semi- annually? n = 3*12 = 36.
