![]() The rate refers to the APR of the Annual Percentage Rate. So that begs the question is why are they different? How are they related? And most importantly, which one is going to tell me how much money I'm going to make when I invest in this product? Well, let's go through this starting with the rate. It has a rate and an APY and these numbers 2.37, 2.4, they're different. And one of the things you notice when looking at these rates is when you're looking at these savings vehicles is that each one has two different rates. Now the jumbo that just refers to, I think a minimum deposit of $100,000. It is a savings vehicle most banks offer and here is one, two, three, four banks. Here is a snapshot from December of 2014 of rates on five year jumbo CDs, where CD just stands for certificate of deposit. And we're also going to discuss how to deal with compounding of interest when it's not just annually. So we're going to talk about interest rate quotes and we're going to learn how to deal with cash flows that don't arrive once a year, but may arrive monthly or semi annually. ![]() Now, I want to turn to interest rates in this lecture and this isn't so much a new topic as much as it is really an extension of the time value of money to incorporate institutional details and make things a little bit more realistic. Then we closed off the topic with a discussion of taxes and inflation and investigated how those two concepts would impact both our dollar return and the purchasing power of those dollars. ![]() Namely, the present value of an annuity formula and the present perpetuity formula as well as formulas for the present value of grown annuity and a growing perpetuity. And we use those tools to discount cash flows, that is move them back in time and compound cash flows are moving forward in time. For time, it's what we used to move cash flows forward and backward in time. And a discount factor, which is our exchange rate. Then we introduced the tools associated with the time value of money, namely a timeline, which is just a visual representation of when money is coming or going. What we did is we showed that cash or money received or paid at different points in time as a different time unit and as such can't be added, much like different currencies can't be added. So we started off that topic by introducing the concept with some intuition. But before doing so, I want to briefly review our first topic, Time Value of Money. Today, we're going to be turning to a new topic, interest rates. In this topic, interest rates, I want to start off by talking about interest rate quoting conventions and I want to talk about how to compute the present value and future value of string of cash flow when they arrived at irregular time, non-annual and when the compounding is not annual as well. We discussed some useful shortcuts to compute the present value and the future value of cash flow streams that we commonly come across in practice, streams like an annuity and a perpetuity and then we close out the topic by talking about taxes and inflation and their impact on our dollar returns and our ability to consume goods and services. Namely, the discount factor and the timeline, then we applied those tools to move money back in time via discounting and forward in time via compounding. As you'll recall, we started off with some intuition, then we introduced the tools associated with the time value of money. But before doing so, I want to briefly review our last topic, the time value of money. Today, we're going to turn to a new topic, interest rates.
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