Finance interest

Overview

TODO:

how are interest rates set?

Terminology

yield:
return:

principal:           amount lent
compounding-period:  interval that interest is added to the principal (ex. quarterly)
periodic-return:     percentage paid per compounding-period

Prime-Rate/Overnight Rate

The Bank of Canada sets their cost of borrwing nightly based on the economy.
If country's inflation or GDP are low, the overnight-rate will be decreased to encourage spending, and stimulate the economy.
Banks borrow money from the Bank of Canada, and are charged the overnight-rate for borrowing.
They in turn finance businesses and individuals at an interest-rate relative to the overnight-rate they borrwed at.

The prime-rate is set at the bank's discretion, and is the rate the bank would charge their most dependable customers to borrow money.
Financings interest rates are generally expressed as prime + N%

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

Accounts for compounding interest (but not inflation).

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

TODO:

could you sub in real-interest-rate to account for inflation here?

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

https://www.calculatorsoup.com/calculators/financial/effective-interest-rate-calculator.php

Annual Percentage Rate

https://corporatefinanceinstitute.com/resources/knowledge/finance/annual-percentage-rate-apr/