33:010:325 Lecture Notes - Lecture 7: Interest

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2 types of interest: simple interest: interest = computed on principal (stand-alone basis) & isn"t computed on any interest earned & left on deposit. Simple interest = principal * interest rate * time: compound interest: interest computed on both principal & interest left on deposit. Any interest earned = immediately included in computation of next pd"s interest. The compound interest that you get = called the effective rate. Basic time value concepts: fundamental variables: Rate of interest (r) = (annual rate)/(number of compounding periods per yr) # time periods (n) = number of years * number of compounding periods per yr. Compound interest tables: when interest is compounded more than once per yr, we determine interest rate in computations by dividing annual rate by # of pds. Single-sum problems: if you"re going from present value to future value, that"s compounding (what is amount today worth in the future?)

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