Question

what is the EAR for a 11.8% APR with continuous compounding?

Answer 1

APR means annual percentage rate and EAR means effective annual interest rate which takes into account compounding of interest.

Effective interest rate formula

r =

( 1 + i / n)n - 1

where r = effective interest rate, i = Annual interest rate and n represents number of comounding periods per year

We are assuming that interest is compunded daily in this example

So i = 11.8% i.e. i = 0.118

n = 365 days

So effective interest rate = (1 + 0.118/365)365 - 1

So effective interest rate = 12.522%

Effective interest rate is calculated by using excel formula.