Nominal and Effective Interest Rates Annual percentage rate
- Slides: 7
Nominal and Effective Interest Rates Annual percentage rate Annual percentage yield CEE 4200 Fall 2017
Today’s Learning Objectives 1. Differentiate nominal from effective interest rates 2. Calculate an effective rate from a nominal rate 3. Reconcile payment period (PP) and compounding period (CP) in cash flows 4. Use spreadsheet functions to find – – Present and future values Effective interest rates 2
Comparing Nominal and Effective Interest Rates Rate Compound Usage Type Nominal Simple, No Annual percentage rate (APR) Effective Yes Annual percentage yield (APY) Value Smaller (if CP < PP) Larger (if CP < PP)
Example 1. What is the annual percentage rate (APR) given a 0. 01% daily rate
Example 2. What is the annual percentage yield of 0. 01% daily rate compound daily?
Reconcile Compounding Period and Payment Periods Case PP = CC PP > CC PP < CC Action Business as usual. Use ie= r in factors. Multiply n by CC Find effective rate for PP. Use in factors Assign credits to beginning of CC, debits to end of PP. Example • $200/year for 4 years • 12%/year compounded yearly $200 (F/A, 12%, 4 years) • $200/year for 4 years • 12%/year compounded monthly $200 (F/A, ie, 4 years) • $200/month for 24 months at 1%/month compounded quarterly $600 (F/A, 1%*3, 8 qtrs)
Two Minute Feedback (handwrite, no name, turn in up front) 1. What went well today? 2. What remains unclear (that you would like me to clarify for next class)?
