UGBA 180 Chapter Notes - Chapter 3: Annual Percentage Yield, Sinking Fund, Compound Interest
22 May 2018
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Chapter 3: Tie Value of Moey
• Compound interest: earning interest on interest
o I: dollar amount of interest earned during the year
o Compounded once per year: FV = PV(1+i)n
o Compounded more than once per year: FV = PV(1+(i/m))n*m
▪ m=number of intervals within a year
• Effective annual yield (EAY): used to find the interest rate
o EAY = (FV – PV) / PV
o More frequent compound interval = higher EAY
o Annual percentage yield (APY): used by banks; same as EAY
• Calculator
o Money spent/deposited (-) and money received (+)
• Time value: money has time value because $1 today is better than $1 in the future
• Discounting: concerned with the present value or price that should be paid today for a particular investment
o PV = FV /(1+i) n
• Annuity: series of deposits or payments that are made at equal time intervals
o Final deposit doesn’t earn interest eause it ours at the end of the final year
• Accumulation of a future sum: lump sum at the end of the period + interest
• Sinking fund factor: factor of 0.163797
• Interest rates are easier to compare than cash flows, and it accounts for the time value of money
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