Question

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

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.