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What is the effective annual rate (EAR)? a
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. |
Expert Solution
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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