30 years: Financial markets trader
Following Abdulla's video on interest rate fundamentals and simple versus compound interest, this video aims to consolidate that knowledge by working through six simple exercises.
Following Abdulla's video on interest rate fundamentals and simple versus compound interest, this video aims to consolidate that knowledge by working through six simple exercises.
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5 mins 24 secs
Recap on calculation formulae: periodic rate, EAR and compounding.
Key learning objectives:
What is the periodic rate formula?
What is the EAR formula?
What is the compounding formula?
Which of the following is better for a borrower?
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The nominal annual rate divided by frequency; NAR/n
EAR = (1 + periodic rate)periods – 1
or
EAR = er*t – 1
1 + periodic rateperiods
Borrowing at 4.30% and paying interest semi-annually or borrowing at 4.20% and paying monthly? Borrowing at 4.30% on a semi-annual basis gives an EAR of 4.346%. Borrowing at 4.20% and paying interest monthly gives an effective rate of 4.282%. A borrower should borrow at 4.20% and pay monthly a depositor should go for the other option as that gives them a higher effective return.
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