Question

What is the average EAR on an investment that earns a 6% APR with monthly compounding for five (5) years, followed by an 8% APR with quarterly compounding for an additional eight (8) years. Enter your answer as a percentage rounded to two (2) decimal places.

Answer 1

EAR = [(1 +stated rate/no. of compounding periods) ^no. of compounding periods - 1]* 100

Effective Annual Rate = ((1+6/12*100)^12-1)*100

Effective Annual Rate% = 6.1678

EAR = [(1 +stated rate/no. of compounding periods) ^no. of compounding periods - 1]* 100

Effective Annual Rate = ((1+8/4*100)^4-1)*100

Effective Annual Rate% = 8.2432

Avg EAR = ((1+0.061678)^5*(1+0.082432)^8)^(1/(8+5))-1

=7.44%