Cherry Mae Genovata CLCA-301

JULY 25, 2011 FINANCE

1.) Compound interest - may be contrasted with simple interest, where interest is not added to the principal (there is no compounding). Compound interest is standard in finance and economics, and simple interest is used infrequently (although certain financial products may contain elements of simple interest). In order to define an interest rate fully, and enable one to compare it with other interest rates, the interest rate and the compounding frequency must be disclosed. Since most people prefer to think of rates as a yearly percentage, many governments require financial institutions to disclose the equivalent yearly compounded interest rate on deposits or advances. 2.) Effective Interest- A preferred procedure for amortizing a discount or premium; also called present value amortization. Under the effective interest method, interest expense is based on the increasing (for discounts) or decreasing (for premiums) book value of the bonds. The total interest expense for each interest period is the carrying amount (book value) of the bonds at the start of that period multiplied by the effective interest rate. The amount of amortization of the bond discount or premium is the difference between the total (effective) interest expense for the period and the accrued nominal interest. As the carrying amount changes each period by the amount of amortized discount or premium, interest expense either increases (for discounts) or decreases (for premiums) over the life of the bonds.

3.) Nominal interest rates- refer to refers to the rate of interest prior to taking inflation into account. Depending on its application, an inflation and risk premium must be added to the real interest rate in order to obtain the nominal rate. 4.) Ordinary annuity- is a fixed payment at the end of a period towards an expense. The best example of an ordinary annuity is a mortgage loan. Once you take a mortgage loan, at the end of every month, you're supposed to pay a certain predecided amount towards mortgage payments. Ordinary annuity is thus a series of payments paid to cover some sort of expense. EMI is again a very common example of an ordinary annuity.

5.) Future value of Money- is the sum that an investment with a fixed, compounded interest rate will grow to by a specified future date. For purposes of the calculation, the investment can be a single, lump sum deposited at the beginning of the first investment period or an annuity with a series of equally-spaced payments. The time value of money presents an important financial concept as it can be used to compare and evaluate investment alternatives and to make other financial decisions. 6.) Present value- also known as present discounted value, is the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk. Present value calculations are widely used in business and economics to provide a means to compare cash flows at different times on a meaningful "like to like" basis.

Joanna Rose Balmes CLCA 301

JULY 25, 2011 FINANCE

1.) Compound interest - arises when interest is added to the principal, so that from that moment on, the interest that has been added also it earns interest. This addition of interest to the principal is called compounding. A bank account, for example, may have its interest compounded every year: in this case, an account with $1000 initial principal and 20% interest per year would have a balance of $1200 at the end of the first year, $1440 at the end of the second year, and so on. In order to define an interest rate fully, and enable one to compare it with other interest rates, the interest rate and the compounding frequency must be disclosed. Since most people prefer to think of rates as a yearly percentage, many governments require financial institutions to disclose the equivalent yearly compounded interest rate on deposits or advances. For instance the yearly rate for a loan with 1% interest per month is approximately 12.68% per annum (1.01^12 - 1). This equivalent yearly rate may be referred to as annual percentage rate (APR), annual equivalent rate(AER), annual percentage yield, effective interest rate, effective annual rate, and by other terms. When a fee is charged up front to obtain a loan, APR usually counts that cost as well as the compound interest in converting to the equivalent rate. These government requirements assist consumers to compare the actual costs of borrowing more easily. For any given interest rate and compounding frequency, an "equivalent" rate for any different compounding frequency exists. Compound interest may be contrasted with simple interest, where interest is not added to the principal (there is no compounding). Compound interest is standard in finance and economics, and simple interest is used infrequently (although certain financial products may contain elements of simple interest).

2.) Effective Interest- Is a technique for calculating the actual interest rate in a period based on the amount of a financial instrument's book value at the beginning of the accounting period. Thus, if the book value of the financial instrument decreases, so too will the amount of related interest; if the book value increases, so too will the amount of related interest. This method is used to properly account for bond premiums and discounts. Which is used in the calculation, exactly discounts estimated future cash payments or receipts over the expected life of the instrument under the effective interest method. 3.) Nominal interest rates- refer to refers to the rate of interest prior to taking inflation into account. Depending on its application, an inflation and risk premium must be added to the real interest rate in order to obtain the nominal rate.

4.) Ordinary annuity- is a fixed payment at the end of a period towards an expense. The best example of an ordinary annuity is a mortgage loan. Once you take a mortgage loan, at the end of every month, you're supposed to pay a certain pre-decided amount towards mortgage payments. Ordinary annuity is thus a series of payments paid to cover some sort of expense. EMI is again a very common example of an ordinary annuity. 5.) Future Value of Money- is the sum that an investment with a fixed, compounded interest rate will grow to by a specified future date. For purposes of the calculation, the investment can be a single, lump sum deposited at the beginning of the first investment period or an annuity with a series of equallyspaced payments. The time value of money presents an important financial concept as it can be used to compare and evaluate investment alternatives and to make other financial decisions. 6.) Present value, also known as present discounted value, is the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk. Present value calculations are widely used in business and economics to provide a means to compare cash flows at different times on a meaningful "like to like" basis.