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.
Interest rates can be decided by the financing issuer, but are normally set relative to the country's overnight-rate (the cost the federal-reserve, or bank-of-canada charges to borrow money).
In some countries this rate must be below a certain APR, meaning it can be illegal to collect revenue to quickly on a financing.
Tutorials
khan academy: interest/compound interest https://www.youtube.com/watch?v=GtaoP0skPWc&list=PL9ECA8AEB409B3E4F
Terminology
yield: return: principal: amount borrowed compounding-period: interval that interest is added to the principal (ex. quarterly) periodic-return: percentage paid per compounding-period
Overview of Financing/Interest
Simple Interest
In simple interest, the interest-rate is multiplied against the outstanding principal each compounding period.
week 0 1000$ 0 week 1 1000$ 1000$ * (1 + 0.1) == 1100$ week 2 1000$ 1000$ * (1 + (2 * 0.1)) == 1200$ Compound Interest
Prime-Rate/Overnight Rate
TL;DR the overnight-rate is what the central bank charges to lend money.
the prime-rate is the rate a bank will charge people most likely to pay back money (which is influenced by the 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/