Question

If the APR is 8% and compounding is weekly, what is (a) the periodic rate and (b) the EAR?

Can you explain step by step, how to understand the question?

Answer 1

a.Periodic rate= Annual interest rate/ Number of times a year interest compounds

                            = 8%/ 52

                            = 0.1538%   0.15% per week.

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+0.08/52)^52-1

        = 1.0832 -1

        = 0.0832*100

        = 8.3220% 8.32%.

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