When doing trial and error for discount rate. What’s the relationship between computed PV and interest rate (when rate is too low/high)
Inverse relationship.
If computed PV is too high, interest rate is too low (so increase rate).
If computed PV is too low, interest rate is too high (so decrease rate).
What is the EAR and when is it used
Effective Annual Rate
The actual rate paid/received after accounting for compounding that occurs during the year.
Need to use it when comparing alternative investments with different compounding periods
What is the APR
Annual Percentage Rate
The annual rate quoted by law
How are mortgages compounded
Semi annually
Pure Discount Loans - what’s a treasury bill
Principal amount is repaid at some future fate, without any periodic interest payments
What’s an amortized loan, how do you calculate it
Lender requires the borrower to repay parts of the principal over time, making regular principal reductions.
You make a table with year, beg bal., total pmt, interest pmt, principal pmt, end. bal.
What’s a balloon payment
Amortized loan, paying part of principal every period, but if there is left over principal at the maturity date, the balloon payment is the larger payment at the end to pay off the rest of the loan/payment
