Question

What is effect of using the "EAR in the Annuity Formula," and what effect does it...

What is effect of using the "EAR in the Annuity Formula," and what effect does it have on interest rates?

Homework Answers

Answer #1

The annuity payment formula is used to calculate the periodic payment on an annuity. An annuity is a series of periodic payments that are received at a future date. During calculation, it is important to note the rate per period and number of periods, i.e., how often the payment is made. Now, since we typically consider frequency of the annuity payments to be the same as the compounding period for the interest rate, we use Effective Annual Rate (EAR) rather than Annual Percentage Rate (APR), with the latter only considering the effect of simple interest.

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