If you have quarterly rate (periodic rate) and want to calculate an EAR (effective annual rate),...

If you have quarterly rate (periodic rate) and want to calculate an EAR (effective annual rate), is it a simple multiplication problem? t or f

Solutions

Expert Solution

EAR(Quarterly rate): (1+i/4)^4n

Where, i=Interest rate. n=No. of period

EAR(Annual rate): (1+i)^n

If EAR(Quarterly rate) is multiplied with 4 we can't get EAR(Annual rate).It is not a simple multiplication problem.

Statement is FALSE(f).

Example: Let, i=10% n=1

(i) EAR(Quarterly rate): (1+0.10/4)^4=1.1038

(ii) EAR(Annual rate): (1+0.10)^1=1.10

jeff jeffy answered 2 years ago

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