Question

Calculate the effective annual rate for each.

6 percent compounded annually. %

6 percent compounded semiannually. %

6 percent compounded quarterly. %

6 percent compounded monthly. %

Answer 1

- Calculating Effective Annual Rate(EAR):-

a). 6 percent compounded annually. %

Where,

r = Interest rate = 6%

m = no of times compounding in a year = 1 (compounded annually)

EAR = 1.06 - 1

EAR = 6%

b). 6 percent compounded semiannually %

Where,

r = Interest rate = 6%

m = no of times compounding in a year = 2 (compounded semiannually)

EAR = 1.0609 - 1

EAR = 6.09%

c). 6 percent compounded quarterly %

Where,

r = Interest rate = 6%

m = no of times compounding in a year = 4 (compounded quarterly)

EAR = 1.0614 - 1

EAR = 6.14%

d). 6 percent compounded Monthly %

Where,

r = Interest rate = 6%

m = no of times compounding in a year = 12 (compounded Monthly)

EAR = 1.0617 - 1

EAR = 6.17%