What is the effective annual rate (EAR)?

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What is the effective annual rate (EAR)? a

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What is the effective annual rate (EAR)?

	a.	The discount rate for an n-year time interval, where n may be more than one year or less than or equal to one year (a fraction).
	b.	The ratio of the number of the annual percentage rate to the number of compounding periods per year.
	c.	The interest rate that would earn the same interest with annual compounding.
	d.	The cash flows from an investment over a one-year period divided by the number of times that interest is compounded during the year.
	e.	None of the answers are correct.

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Answer is OPTION C EAR is the interest rate that would earn the same interest with annual compounding. It is the rate of interest that an investor can earn (or pay) in a year after taking into consideration compounding.

EAR=[(1+i/n)^n]-1

Where i= annual interest rate

n= number of compounding periods

EAR is calculated in related to investments, loans or other financial products.

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