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Real Risk-Free Rate 2. Expected Inflation 3. Default-Risk Premium 4. Liquidity Premium 5. Maturity Premium
The notion that a given sum of money is more valuable the sooner it is received, due to its capacity to earn interest.
= annuity payment A/interest rate r
= (1 + Periodic interest rate)^m - 1(Where: m = number of compounding
periods in one year, and periodic interest rate = (stated interest rate)
/ m)
= PV * (1 + r)^N
...quarterly, monthly, daily and even continuously.
This assumes no risk or uncertainty, simply reflecting differences in
timing: the preference to spend now/pay back later versus lend
now/collect later.
What is the chance that the borrower won't make payments on time, or
will be unable to pay what is owed? This component will be high or low
depending on the creditworthiness of the person or entity involved.
(or quoted rate) is the interest rate on an investment if an institution were to pay interest only once a year.