Question

Calculating EAR Find the EAR in each of the following cases: Stated Rate (APR) # Compounding Periods 8.55% Quarterly 11.45% Monthly 8.77% Daily

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Answer 1

Effective annual rate (EAR) :

It is the interest rate that is actually earned or paid on an investment,loan or other financial product due to the result of compounding over a given time period

EAR = [ 1 + (APR/m)]^m – 1

APR = interest rate

m = number of compounding period

calculation of EAR

quarterly

EAR = [ 1 + ( 0.0855/4)]⁴ – 1    = 0.08828 or 8.828 %

monthly

EAR = [ 1 + ( 0.1145/12)]¹² – 1 = 0.1207 or 12.07%

daily ( 365 days in a year)

EAR = [ 1 + ( 0.0877/365)]³⁶⁵ – 1 = 0.09164 or 9.164%