Finance interest

Overview

TODO:

how are interest rates set?

Terminology

yield:
return:

nominal:
real:
effective:

Rate Types

Nominal Interest Rate

Does not account for inflation.

if nominal_rate == 5%:
    5$ interest on each 100$ paid

Calculation, and Terminology:

principal:           amount lent
compounding-period:  interval that interest is added to the principal (ex: quarterly)
periodic-return:     percentage paid per compounding-period
num-periods:         number of periods until complete (or in observed timespan ex: 1yr)

${\text{nominal-interest-rate}}=(1+{\text{periodic-return}})^{\text{num-periods}}-1$

Real Interest Rate

Nominal interest rate, with the inflation-rate removed.
Emphasizes value at end of period.

${\text{real-interest-rate}}={\frac {1+{\text{nominal-interest-rate}}}{1+{\text{inflation-rate}}}}-1$

Effective Interest Rate

Annual Interest Rate