What is the effective annual rate (EAR)?a.The discount rate for an n-year time interval, where n may be more than one year or less than or equal to one year (a fraction).b.The interest rate that would earn the same interest with annual compounding.c.the ratio of the number of the annual percentage rate to the number of compounding periods per year.d.All of them.e.the cash flows from an investment over a one-year period divided by the number of times that interest is compounded during the year
Question
What is the effective annual rate (EAR)?a.The discount rate for an n-year time interval, where n may be more than one year or less than or equal to one year (a fraction).b.The interest rate that would earn the same interest with annual compounding.c.the ratio of the number of the annual percentage rate to the number of compounding periods per year.d.All of them.e.the cash flows from an investment over a one-year period divided by the number of times that interest is compounded during the year
Solution
The correct answer is b. The interest rate that would earn the same interest with annual compounding.
The Effective Annual Rate (EAR) is the interest rate that is adjusted for compounding over a given period. Simply put, the effective annual rate is the rate of interest that an investor can earn (or pay) in a year after taking into consideration compounding.
The EAR is used to compare the annual interest between financial products that have different compounding periods.
Similar Questions
Which of the following statements is correct?Question 4Answera.An annual percentage rate (APR) does not include the effect of compounding, therefore it is usually higher than EAR.b.EAR is the annual interest rate that would earn the same interest with a quoted annual compounding interest rate.c.EAR refers to the interest earned by cash flows from an investment over a one-year period divided by the number of times that interest is compounded during the year.d.An effective annual rate (EAR) is the rate that interest earns in one year before the effect of compounding.
The effective annual rate (EAR) for a savings account with a stated APR of 4% compounded daily (use 365-day year) is closest to: a. 14.60%. b. none of them. c. 4.08%. d. 4.00%. e. 3.92%.
The effective annual rate (EAR) for a loan with a stated APR of 10% compounded quarterly is closest to:a.9.65%.b.12.50%.c.15.00%d.10.00%.e.10.38%
See how the effective return varies betweeninvestments with the same nominal rate(10%), but different compounding intervals.– EAR ANNUAL 10.00%– EAR QUARTERLY 10.38%– EAR MONTHLY 10.47%– EAR DAILY (365) 10.52%32??
Which of the following statements is FALSE?a.The annual percentage rate indicates the amount of simple interest earned in one year.b.Because interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of our cash flows.c.The effective annual rate indicates the amount of interest that will be earned at the end of one year.d.None of them.e.The annual percentage rate indicates the amount of interest including the effect of compounding.
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