Important Ch5 L3

Question 1

Interest rates

Answer 1

price of using money

Question 2

Most common way a to report interest rates

Answer 2

For interest rates that will be esrned in one year it is: EAR (effective annual rate) or APY (annual percentage yield)

However the interest rate must be in the same period as the cash flows in order to make proper calculations

Question 3

APR

Answer 3

Annual oercentage rates indicate SIMPLE interest rates per one year (interest without compounding)

APR must be converted to EAR since the APR is a way of quoting the interest earned each compounding period (month/week/year etc)

Question 4

Opportunity cost of capital

Answer 4

the best available return offered in the market on an investment of comparable risk and term to the cash flow being discounted