Question

Find the EAR in each of the following cases: a. 6% compounded quarterly b. 20% compounded monthly c. 11% compounded daily d. 8% with continuous compounding

Answer 1

a.Effective annual rate is calculated using the below formula:

EAR= (1+r/n)^n-1

Where r is the interest rate and n is the number of compounding periods in one year.

EAR= (1+0.06/4)^4 - 1

= 1.0614 - 1

= 0.0614*100

= 6.14%.

b.Effective annual rate is calculated using the below formula:

EAR= (1+r/n)^n-1

Where r is the interest rate and n is the number of compounding periods in one year.

EAR= (1+0.20/12)^12 - 1

= 1.2194 - 1

= 0.2194*100

= 21.94%.

c.Effective annual rate is calculated using the below formula:

EAR= (1+r/n)^n-1

Where r is the interest rate and n is the number of compounding periods in one year.

EAR= (1+0.11/365)^365 - 1

= 1.1163 - 1

= 0.1163*100

= 11.63%.

d.Effective annual rate is calculated using the below formula:

i= e^r - 1

= 2.71828^0.08 - 1

= 0.083287*100

= 8.33%.

In case of query, kindly comment on the solution.