1. Title Slide
Do you remember the question I gave you earlier where two banks were
both offering 10% nominal interest rates, but one bank compounded this interest
quarterly and the other bank used monthly compounding? Well, I want to use
this scenario to introduce some more financial math language. There is a
little bit of jargon that we want to get our heads around.
Now, remember, both banks were offering a nominal rate of 10%.
Banks also call this the Annual Percentage Rate or APR. Remember,
the nominal interest rate or APR does not take into account the impact
of any compounding frequencies. In comparison, the effective rate, which
a bank may also call the Effective Annual Rate, EAR, or the Annual
Percentage Yield, APY, is the rate of return you actually earn,
because it does take into account the compounding frequency.
2. Let's practice!