BU283 Chapter Notes - Chapter 3: Annual Percentage Rate, Interest, Compound Interest
Document Summary
Chapter 3: introduction to the time value of money. Example 3. 1: simple interest and one-period future value. Compute simple interest earned on a 1-year deposit that earns 5% per year and compute the future value of the deposit. The interest is computed as the deposit multiplied by the interest rate: The future value at the end of the year is the sum of the original deposit and the interest: future value = + = . In the example, the of interest is simple interest because it is the interest earned on the original principal. Future value = present value + (present value x interest) = pv x (1 + i) The original deposit is also called the principal or the present value and denoted pv. The interest rate, denoted i, is 5% This rate is called the quoted rate, the nominal rate, or the annual percentage rate (apr)
