Question

If the APR is 16%, calculate the EAR under the following conditions:

(i) Monthly compounding

(ii) Annual compounding

(iii) Semi-annual compounding

(iv) Daily compounding

(v) Infinite compounding

Answer 1

a.EAR=[(1+APR/m)^m]-1
where m=compounding periods

=[(1+0.16/12)^12]-1

=17.23%(Approx)

b.EAR=[(1+APR/m)^m]-1
where m=compounding periods

=[(1+0.16/1)^1]-1

=16%

c.EAR=[(1+APR/m)^m]-1
where m=compounding periods

=[(1+0.16/2)^2]-1

=16.64%

d.EAR=[(1+APR/m)^m]-1
where m=compounding periods

=[(1+0.16/365)^365]-1

=17.35%(Approx)

e.EAR=(e)^APR-1

where e=2.71828

=[(2.71828)^0.16]-1

=17.35%(Approx).