Finance interest: Difference between revisions
From wikinotes
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== Effective Interest Rate == | == Effective Interest Rate == | ||
<blockquote> | <blockquote> | ||
Accounts for compounding interest (but not inflation?). | |||
<math> | <math> | ||
\bigg( 1 + \dfrac{\texttt{nominal-interest-rate}}{\texttt{compounding-periods}} \bigg)^{\texttt{compounding-periods}} - 1 | \bigg( 1 + \dfrac{\texttt{nominal-interest-rate}}{\texttt{compounding-periods}} \bigg)^{\texttt{compounding-periods}} - 1 |
Revision as of 04:02, 2 November 2021
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.
if nominal_rate == 5%: 5$ interest on each 100$ paidReal Interest Rate
Accounts for inflation.
Effective Interest Rate
Accounts for compounding interest (but not inflation?).
Annual Interest Rate