Finance interest

Overview

TODO:

how are interest rates set?

Terminology

yield:
return:

nominal:
real:
effective:

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)

Rate Types

Nominal Interest Rate

Does not account for inflation.

$(1+{\texttt {periodic-return}})^{\texttt {compounding-periods}}-1$

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

https://www.educba.com/real-interest-rate-formula/

Real Interest Rate

Accounts for inflation.

${\frac {1+{\texttt {nominal-interest-rate}}}{1+{\texttt {inflation-rate}}}}-1$

https://www.educba.com/real-interest-rate-formula/

Effective Interest Rate

${\bigg (}1+{\dfrac {\texttt {nominal-interest-rate}}{\texttt {compounding-periods}}}{\bigg )}^{\texttt {compounding-periods}}-1$

https://corporatefinanceinstitute.com/resources/knowledge/finance/effective-annual-interest-rate-ear/

Annual Interest Rate