Nominal rates and effective rates

 i 
n

i *  1    1
 n 

 1

i  1  i * n  1  n
 

i = nominal rate
i* = effective rate (equivalent annual interest rate)
n = number of payments per year

Continuous compounding

365  days 
r  LN 1  i  
days  year 

year  r  365 
days

i  e  1
days  

r = continuously compounding interest rate

Discount Factors

For simple interest

1
f 
days
1 i 
year

For compound interest

N
 1 
f  
1 i 

For continuously compounded interest

days
r 
f e 365

For short term investments

  days 
FV  PV  1  i  
 year 

FV
PV 
days
1 i 
year

 FV  year
i   1 
 PV  days

365
 FV  days
i*    1
 PV 

i = yield
i* = effective yield (annual equivalent)

For long-term investments over N years

FV  PV  1  i 
N

FV
PV 
1  i  N
1
 FV  N
i   1
 PV 

Cashflow Analysis

CF1 CF2 CFn CFn

NPV  CF0     
1  i  1  i  2
1  i  n
1  i  n
NPV = net present value
IRR = internal rate of return = interest rate required to achieve NPV=CF0

Interpolation and extrapolation

 d  d1 
i  i1   i 2  i1  
 d 2  d1 