Question

r=12% per year , compounded monthly, quarterly, seminaually, yearly , 2 years

effective interest rate

Answer 1

Effective annual rate ,EAR=((1+r/n)^n )-1

r is nominal interest rate=12%

n is the no of times compounded in year

For monthly compounding n=12,ie every month

EAR=((1+0.12/12)^12)-1

=0.1268=12.68%

For quarterly compounding n=4 times a year.or every three months

EAR=((1+0.12/4)^4)-1=0.1255=12.55%

For semi annual compounding n=2,every six months

EAR=((1+.12/2)^2)-1=0.1236=12.36%

For annual compounding rates remains same EAR=12% since compounding period is annual same time period as EAR.

For compounding in two years n=0.5.That is 1/2 times every year

EAR=((1+.12/.5)^.5)-1=.1135=11.35%