Question

What is the effective annual rate​ (EAR)?

A. It is the interest 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. It refers to the cash flows from an investment over a one-year period divided by the number of times that interest is compounded during the year.
C. It is the interest rate that would earn the same interest with annual compounding.
D. It is the ratio of the number of the annual percentage rate to the number of compounding periods per year.

Answer 1

The correct option here is C) .

Step-by-step explanation:

The EAR (effective annual interest rate) which is also know as annual equivalent rate, is the interest rate which is either earned or it is paid on a loan or an investment or any financial product because of the compounding done over a defined period of time. This rate comes in very handy when one has to compare different products like loans or certificate of deposits.

FORMULA -

= ( 1 + i / n )^n - 1

where i = interest rate(NOMINAL ) and n = number of periods

Answer 2

Answer: The effective annual rate​ (EAR) is the interest rate that would earn the same interest with annual compounding.

The Effective Annual Rate (EAR) is know as the interest rate earned on a subject/asset or remunerated on a borrowing as a consequence of compounding interest over period of time.

The formula to compute effective annual rate is as follow:

`Effective Annual Rate = [1 + (interest rate)/(compounding periods)]^(time periods) - 1`

∴ Option (c) is correct.