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Define Remaining Balance
multiply the contractual interest rate times the balance due on the loan
Define the Add-on method
the total loan plus interest is added together and divided by the number of payments to be made
Define Discount Method
total interest is paid up front (deducted from the loan amount) and then the principle is repaid
What are the 3 interest charges on loans?
1. Remaining balance
2. Add-on method
3. Discount method
How do you calculate what $100 is worth in the future period?
$100(1 + r) = value
How do you calculate what $100 is worth in two periods in the future?
($100 (1 + r))(1 + r) = Value t+2
How do you calculate what $100 is worth in three periods in the future?
($100 (1 + r)^3) = Value t+3
What if you want to calculate its value any number of periods in the future?
What is it called?
What is the general equation?
($100 (1 + r)^n) = Value t+n
Interest compounding
(Value t (1 + r)^n) = Value t+n
What if you want to calculate the current value of a flow of money you will receive or pay in the future?
Value t = Value t+n / (1 + r)^n
Discounting
Define the Internal Rate of Return
the interest rate that causes the following formula to be equal to hold:
_T_
_E',_ ((Value n) / (1 + r)^n) = 0
n = 0
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