In: Finance
1. Suppose you are given an APR of 5.3% that compounds semiannually, what is the EAR?
A. 5.3%
B. 5.37%
C. 5.41%
D. 5.27%
2. An Effective Annual Rate (EAR) _____________.
A. is an interest rate expressed as if it were compounded four times a year.
B. is used to compare investments with different compounding
C. is the same as an Annual Percentage Rate (APR)
D. All the above
Answer 1)
EAR = (1 + r / m )m - 1
Where, r = rate of interest
m =No. of periods
So putting the values in formula
EAR = (1 + 0.053 / 2 )2 - 1
= 0.0537
Therefore EAR = 0.0537 X 100
= 5.37% i.e Option B
Answer 2)
Option B is correct beacuse EAR takes compund interest into account.