Question

I am putting $1,000,000 in a CD with a stated rate of 5.3% for one year. What would the rate be if

you compounded daily, weekly, monthly and semi annually? More commonly known as the
Effective Annual Rate (EAR)?
You have $450,000 in the bank and you are looking for an investment for 10 years. You believe you
can get an 8.3% return on your investment. How much will you have in 10 years?

Answer 1

The Effective Annual Rate (EAR) for different compounding periods can be calculated using the formula: EAR = (1 + (stated rate/n))^n - 1, where n is the number of times the interest is compounded per year. For daily compounding, n would be 365, for weekly compounding, n would be 52, for monthly compounding, n would be 12, and for semi-annual compounding, n would be 2.

Step-by-step explanation:

The Effective Annual Rate (EAR) for compounding daily can be calculated using the formula:

EAR = (1 + (stated rate/n))^n - 1

where:

• EAR is the effective annual rate
• stated rate is the annual interest rate
• n is the number of times the interest is compounded per year

For compounding weekly, the value of n would be 52 (since there are 52 weeks in a year). For compounding monthly, the value of n would be 12 (since there are 12 months in a year), and for compounding semi-annually, the value of n would be 2 (since there are 2 semi-annual periods in a year).