6.4 Review, Symbols, and Formulas
Key Concepts
Application: Long-Term GICs
- The characteristics and calculations involved with an interest payout GIC
- The characteristics and calculations involved with compound interest GICs
- The characteristics and calculations involved with escalator GICs
Application: Long-Term Promissory Notes
- The sale of interest-bearing promissory notes
- The sale of non-interest bearing promissory notes
Application: STRIP Bonds
- Key characteristics of strip bonds
- Purchase price of a strip bond
- Nominal yields on strip bonds
The Formulas You Need to Know
Symbols Used
[latex]I[/latex] = Interest payment amount
[latex]i[/latex] = Periodic interest rate
[latex]n[/latex] = Number of compounding periods
[latex]FV[/latex] = Future or maturity value
[latex]PV[/latex] = Principal or present value
Formulas Used
Periodic Interest Amount:
[latex]I=PV \times i[/latex]
Periodic Interest Rate:
[latex]i=\frac{\text{Nominal Rate (I/Y)}}{\text{Compoundings per Year (C/Y)}}[/latex]
Maturity Value with Fixed Interest Rate:
[latex]FV=PV(1+i)^n[/latex]
Present Value or Proceeds of Sale of Promissory Note:
[latex]\begin{align} PV&=\frac{FV}{(1+i)^n} \end{align}[/latex]
