2.3 Financial mathematics II

Question 1

What is the annual percentage interest rate (APR)?

Answer 1

• the interest rate expressed in annual terms and qualified by the payment made each period
• also known as ‘quoted interest rate’ and ‘nominal interest rate’
• just the ‘normal’ interest rate

Question 2

What to do when calculating different periods of interest compounding?

Answer 2

• DIVIDE THE RATE, TIMES THE TIME

Question 3

What is the effective annual rate (EAR)?

Answer 3

• The interest rate expressed as if it were compounded each year
  => allows us to COMPARE INVESTMENTS (when different i and n given)