You are offered an investment with a quoted annual interest rate of 13% with quarterly compounding of interest. What is your effective annual interest rate?
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The Effective Annual Interest Rate (EAR) is the interest rate that is adjusted for compounding over a given period. Simply put, the effective annual interest rate is the rate of interest that an investor can earn (or pay) in a year after taking into consideration compounding. EAR can be used to evaluate interest payable on a loan or any debt or to assess earnings from an investment, such as a guaranteed investment certificate (GIC) or savings account.
The effective annual interest rate is also known as the effective interest rate (EIR), annual equivalent rate (AER), or effective rate.
The EAR formula is given below:
Effective Annual Rate formula - EAR
Where:
i = Stated annual interest rate
n = Number of compounding periods
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