5.2 Effect of Compounding Periods on the Time Value of Money Equations
When a financial institution states or gives interest rates for loan repayments, we assume that they are annual percentage rates unless it specifically states otherwise. We must convert these APRs to the appropriate periodic rates when compounding is more frequent than once a year. Therefore, the tables of future value and present value interest factors in Appendices 1 through 4 provide answers for the periodic rates (annually, quarterly, monthly, daily, and so on) and the total number of periods over the length of the loan or investment. Let’s look at the effect of the payments on a mortgage when we shift from annual payments to monthly payments and the application of our ...
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