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Financial Calculations


Ordinary Interest

Interest as calculated on a 360-day-a-year basis.


Compound Interest

Interest that accrues on the initial principal and the accumulated interest of a principal deposit, loan or debt. Compounding of interest allows a principal amount to grow at a faster rate than simple interest, which is calculated as a percentage of only the principal amount. 



The act of discounting a short-term negotiable debt instrument for a second time. Banks may rediscount these short-term debt securities to assist the movement of a market that has a high demand for loans. When there is low liquidity in the market, banks can generate cash by rediscounting short-term securities


Immediate Annuity

The term "annuity," as used in financial theory, is most closely related to what is today called an immediate annuity. This is an insurance policy which, in exchange for a sum of money, guarantees that the issuer will make a series of payments. These payments may be either level or increasing periodic payments for a fixed term of years or until the ending of a life or two lives, or even whichever is longe


Deferred Annuity

A type of annuity contract that delays payments of income, installments or a lump sum until the investor elects to receive them. This type of annuity has two main phases, the savings phase in which you invest money into the account, and the income phase in which the plan is converted into an annuity and payments are received. 


Present value of unequal series of cahs flow 


When we have unequal cash flows, we must first find the present value of each individual cash flow and then sum the respective present values. (Usually with the help of a spreadsheet)


Future value of unequal series of cahs flow


Once we know the present value of the cash flows, we can easily apply time-value equivalence by using the formula to calculate the future value of a single sum of money.


Effective Interest Rate

Effective rate is the interest rate on a loan or financial product restated from the nominal interest rate as an interest rate with annual compound interest payable in arrears.

It is used to compare the annual interest between loans with different compounding terms (daily, monthly, annually, or other).


Real Interest Rate

An interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower, and the real yield to the lender. The real interest rate of an investment is calculated as the amount by which the nominal interest rate is higher than the inflation rate. 

Real Interest Rate = Nominal Interest Rate - Inflation (Expected or Actual)


Revolving Credit Rate

A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is usually used for operating purposes, fluctuating each month depending on the customer's current cash flow needs.


Severance Fee

A bundle of pay and benefits offered to an employee upon being laid off from a company. The receipt of a severance package is contingent upon signing a severance agreement. The amount of money received is usually based on the length of employment prior to termination, and may include payment for unused vacation and sick days, and unreimbursed business expenses. Other continued benefits that may be offered or negotiated include life insurance, disability insurance and the use of company property, such as a laptop, cell phone, personal digital assistant (PDA) or vehicle. Companies may also offer outplacement assistance, to help the former employee find a new job.


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