Question

Your bank offers you a savings account with an APR OF 6% compounded monthly.

a) What is the EAR?

b) What is the monthly and quarterly effective rate?

c) What is the EAR if the APR is 6% compounded weekly?

Answer 1

a.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+0.06/12)^12 - 1

= 1.0617 - 1

= 0.0617100

= 6.17%.

b.i.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+0.06/12)^12 - 1

= 1.0617 - 1

= 0.0617*100

= 6.17%.

b.ii.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+0.06/4)^4 - 1

= 1.0614 - 1

= 0.0614*100

= 6.14%.

c.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+0.06/52)^52 - 1

= 1.0618 - 1

= 0.0618*100

= 6.18%.