Compound interest - Wikipedia
ID: The term ______ is best described as a relationship among principal, interest rate, and time. A. time value of money B. payback period C. annuity D. The term ______ is described as a "formal means of analyzing long-range ______ is best described as a "relationship among principal, interest rate, and time". The term ______ is described as a "formal means of analyzing long-range ______ is best described as a relationship among principal, interest rate, and time.
A typical coupon bond is composed of two types of payments: The two formulas can be combined to determine the present value of the bond.
An important note is that the interest rate i is the interest rate for the relevant period. For an annuity that makes one payment per year, i will be the annual interest rate.
For an income or payment stream with a different payment schedule, the interest rate must be converted into the relevant periodic interest rate. For example, a monthly rate for a mortgage with monthly payments requires that the interest rate be divided by 12 see the example below. See compound interest for details on converting between different periodic interest rates.
Time value of money
The rate of return in the calculations can be either the variable solved for, or a predefined variable that measures a discount rate, interest, inflation, rate of return, cost of equity, cost of debt or any number of other analogous concepts. The choice of the appropriate rate is critical to the exercise, and the use of an incorrect discount rate will make the results meaningless.
For calculations involving annuities, you must decide whether the payments are made at the end of each period known as an ordinary annuityor at the beginning of each period known as an annuity due. If you are using a financial calculator or a spreadsheetyou can usually set it for either calculation.
The following formulas are for an ordinary annuity. The interest rate on an annual equivalent basis may be referred to variously in different markets as annual percentage rate APRannual equivalent rate AEReffective interest rateeffective annual rateannual percentage yield and other terms.
The effective annual rate is the total accumulated interest that would be payable up to the end of one year, divided by the principal sum. There are usually two aspects to the rules defining these rates: The rate is the annualised compound interest rate, and There may be charges other than interest.
The effect of fees or taxes which the customer is charged, and which are directly related to the product, may be included.
Time value of money - Wikipedia
Exactly which fees and taxes are included or excluded varies by country, may or may not be comparable between different jurisdictions, because the use of such terms may be inconsistent, and vary according to local practice. The interest on corporate bonds and government bonds is usually payable twice yearly.
The amount of interest paid each six months is the disclosed interest rate divided by two and multiplied by the principal. The yearly compounded rate is higher than the disclosed rate.
Canadian mortgage loans are generally compounded semi-annually with monthly or more frequent payments. With these loans, an amortization schedule is used to determine how to apply payments toward principal and interest. Interest generated on these loans is not added to the principal, but rather is paid off monthly as the payments are applied.