Which of the following best describes the annual percentage rate?
A.
the effective annual rate, after compounding is taken into account
B.
the quoted interest rate which, considered with the compounding period, gives the effective interest rate
C.
the discount rate, when compounded more than once a year or less than once a year
D.
the discount rate, when effective annual rate is divided by the number of times it is compounded in a year
Ans B. the quoted interest rate which, considered with the compounding period, gives the effective interest rate.
Eg.
| EAR = | ( 1 + r )^n - 1 |
| Compounded Daily | |
| EAR= | ( 1 + 22.99%/365)^365 - 1 |
| EAR= | 25.84% |
| Compounded Monthly | |
| EAR= | ( 1 + 3.5%/12)^12 - 1 |
| EAR= | 3.56% |
| Compounded Quarterly | |
| EAR= | ( 1 + 8%/4)^4 - 1 |
| EAR= | 8.24% |
| Compounded Anually | |
| EAR= | ( 1 + 22.99%/1)^1 - 1 |
| EAR= | 22.99% |
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