Question

Find the EAR in each of the following cases. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. Use 365 days in a year.)

Stated Rate (APR)		Number of Times Compounded	Effective Rate (EAR)
11.75	%	Quarterly		%
14.25	%	Monthly		%
17.75	%	Daily		%
13.75	%	Semiannually		%

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Answer 1

Effective Annual Rate (EAR) is the rate of interest(as a result of compounding over a period of time) actually earned on an investment or paid on a loan.

The formula for EAR is:

EAR = ((1+(Stated Rate /Number of compounding periods)^ Number of compounding periods)  - 1

11.75% quarterly compounded

EAR= [(1+(11.75%/4)) ^4] - 1

EAR = 12.2779%

14.25% monthly compounded

EAR= [(1+(14.25%/12)) ^12] - 1

EAR = 15.2185%

17.75% daily compounded

EAR= [(1+(17.75%/365)) ^365] - 1

EAR = 19.4177%

13.75% semi annually compounded

EAR= [(1+(13.75/2) ^2] - 1

EAR = 14.2227%