Question

Find the EAR in each of the following cases:

a.20% compounded quarterly

b.13% compounded monthly

c. 18% compounded daily

d. 16%with continuous compounding

Answer 1

EAR = [1 + (APR / m)]^m − 1

a. EAR = [1 + (0.20 / 4)]^4 − 1 = 0.2155 or 21.55%

b. EAR = [1 + (0.13 / 12)]^12 − 1 = 0.1380 or 13.80%

c. EAR = [1 + (0.18 / 365)]^365 − 1 = 0.1972 or 19.72%

d. EAR = e^q − 1 = e^0.16− 1 = 0.1735 or 17.35%