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Interest Rates
SI-4251 Ekonomi Teknik
Muhamad Abduh, Ph.D.
Outline Module 3
Interest Rates
Interest Rates Statements
Compounding and Payment Periods
PP = CP
PP > CP
PP < CP
ia 1 i 1
m
0 1 2 3
1 year
P = 30M
A = 750K
0 12 24 36 48
1 year
Method-1:
Method-2:
effective annual interest rate, ia = (1 + r/m)m -1 = (1 + 8%/4)4 – 1 = 8.24%
F = 100M (F/A, 8.24, 3) = 100M (3.257) = 325.7M
0 1 2 3 4 5 6 7 8 9 10 11 12 month
D3
D2 D2
W2
D1 3 W1
0 1 2 3 4
month
It becomes PP =CP D3
2 D2
D1
Cash flow involving interest compounding quarterly
3-13 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.
PP < CP (version 2)
Usually, no interest is paid for funds deposited during an interest period
Deposit made during an interest period are placed at the end of the period within which the transaction
occur and withdrawal made during an interest period are placed at the beginning of the period.
W2
W1 W1 W1
0 1 2 3 4 5 6 7 8 9 10 11 12
D3
D2 D2
W2
D1 3 W1
0 1 2 3 4
It becomes PP =CP D3
2 D2
D1
Cash flow involving interest compounding quarterly
3-14 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.
PP < CP (version 3)
Sometimes, interest is paid for funds deposited during an interest period
W2
W1 W1 W1
0 1 2 3 4 5 6 7 8 9 10 11 12
D3
D2 D2
i e 1 r
Where: e = 2.71828….
0 1 2 3 4
i = 7% i = 7% i = 9% i = 10%
per year per year per year per year