Find the EAR in each of the following cases

Problem 6-12 Calculating EAR [LO4]

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

 

Explanation

For discrete compounding, to find the EAR, we use the equation:

EAR = [1 + (APR/m)]m − 1

EAR = [1 + (.099/4)]4 − 1 = .1027, or 10.27%

EAR = [1 + (.189/12)]12 − 1 = .2063, or 20.63%

EAR = [1 + (.149/365)]365 − 1 = .1606, or 16.06%

To find the EAR with continuous compounding, we use the equation:

EAR = eq − 1

EAR = e.119 − 1

EAR = .1264, or 12.64%

Calculator Solution:

  

Enter	9.9%						4
		NOM			EFF			C/Y
Solve for				10.27%

  

Enter	18.9%						12
		NOM			EFF			C/Y
Solve for				20.63%

   

Enter	14.9%						365
		NOM			EFF			C/Y
Solve for				16.06%