In: Finance
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
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