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Interest Rates
SI-4251 Ekonomi Teknik
Outline Module 3
• Interest Rates
• Interest Rates Statements
• Compounding and Payment Periods
• PP = CP
• PP > CP
• PP < CP
0 1 2 3
1 year
0 12 24 36 48
1 year
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
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
2013 SI-4251 Ekonomi Teknik 3-14
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
• Where: e = 2.71828….
2013 SI-4251 Ekonomi Teknik 16
Interest Rates that Vary Over Time
• Real-world interest rates vary from year to
year. 70,000 70,000 P=?
A=?
• Example: P=? A A A A
35,000
25,000
0 1 2 3 4
i = 7% i = 7% i = 9% i = 10%
per year per year per year per year