Posted by Michael Murray on March 26, 1999 at 17:16:48:
In the Notenetwork site library, look for the article by John Behle entitled Clearing the Calculator Confusion?
Question 1 from course - Posted by Reif
Posted by Reif on March 24, 1999 at 19:52:29:
In “Discounting as Easy as 1,2,3” on page 26 you compute the first two years of the loan amount using annual compounding, but when solving for the discount you use monthly compounding. Understanding that the discount is negotiable anyway, which way is correct?
Thanks,
Reif
Answer #1 - Posted by John Behle
Posted by John Behle on March 26, 1999 at 14:45:24:
The interest on the loan accrues for the first two years. Interest is calculated on an annual compounding unless it is spelled out otherwise. That’s where we get the 9,000 growing to 11,229.20.
When we discount we use a monthly figure for a couple of reasons. One is that there are monthly payments. The other is that it is the general accepted rule.
So, what it is is that there is a firm rule related to how interested accrues and is compounded - yet a conflicting general procedure of discounting in the opposite manner. It has to do with the formulas built into the calculator. You can make a strong argument for the other approach, but you end up trying to swim upstream.
I like to know my true yield and calculate things in that manner. I wrote up some examples of this in an article titled something like “your true yield”, that is available through notenetwork.com if you want some examples.