Finance interest
Interest is the rate that a financing-issuer collects revenue, overtop of the financed amount.
The interest rate does not necessarily reflect the total payback amount, just the allocation of revenue.
In some countries this rate must be below a certain APR, meaning it can be illegal to collect revenue to quickly on a financing.
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 borrowing/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 asprime + N%
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).
TODO:
could you sub in real-interest-rate to account for inflation here?
https://www.calculatorsoup.com/calculators/financial/effective-interest-rate-calculator.php
Annual Percentage Rate
https://corporatefinanceinstitute.com/resources/knowledge/finance/annual-percentage-rate-apr/