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Be able to convert an Annual Interest Rate with different compounding frequencies to an Effective Annual Rate (and vice versa). Example: What is the Effective Annual Rate ("EAR") for 7.35% compounded monthly/

1 Answer

2 votes

Answer:

7.602729%

Step-by-step explanation:

Given:

Rate of interest = 7.35% = 7.35/100 = 0.0735

Effective Annual Rate (Monthly) = ?

Rate of interest(monthly) = 0.0735 / 12 = 0.006125

n = 1 year x 12 = 12 month

Computation:

Effective Annual Rate (Monthly) =
(1+r)^n-1

Effective Annual Rate (Monthly) =
[ (1 + 0.006125 )^(12) - 1 ] * 100 \\


[ (1 .006125 )^(12) - 1 ] * 100 \\[ 1.07602729 - 1 ] * 100\\ [0.07602729 ] * 100 \\7.602729

Effective Annual Rate (Monthly) = 7.602729%

User Danylo Zatorsky
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