Explain the impact of compounding frequency and the difference between annual percentage rate and the effective annual r...
Explain the impact of compounding frequency and the difference between annual percentage rate and the effective annual rate.
Homework Answers
The higher the compounding frequency, the higher is the accumulated or future value given a present value or lower is the present value required to accumulate a given present value.
The primary difference between annual percentage rate (APR) and the effective annual rate (EAR) is that the APR is based on the simple interest, but the EAR accounts for compound interest. APR is most useful in evaluating mortgage & auto loans, but EAR is most useful in evaluating credit cards or frequently compounding loans.
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Explain the impact of compounding frequency and the difference between annual percentage rate and the effective annual r...
EFFECTIVE ANNUAL RATE EAR = An interest rate that reflects annualizing with compounding figured in....
EFFECTIVE ANNUAL RATE EAR = An interest rate that reflects annualizing with compounding figured in. EAR = (1 + APR/m)m - 1, where APR = Annual Percentage Rate and m = compounding frequency A loan is offered with monthly payments and a 10% APR. What is the loan’s Effective Annual Rate: EAR = ?
Compounding frequency, time value, and effective annual rates For each of the cases in the following...
Compounding frequency, time value, and effective annual rates For each of the cases in the following table,囲 a. Calculate the future value at the end of the specified deposit period b. Determine the effective annual rate, EAR. c. Compare the nominal annual rate, r, to the effective annual rate, EAR. What relationship exists between compounding frequency and the nominal and effective annual rates? a. The future value of case A at the end of year 7 is d to the...
LG 5 P5-37 Compounding frequency, time value, and effective annual rates For each of the cases...
LG 5 P5-37 Compounding frequency, time value, and effective annual rates For each of the cases in the following table: a. Calculate the future value at the end of the specified deposit period. b. Determine the effective annual rate, EAR. c. Compare the nominal annual rate,r, to the effective annual rate, EAR. What re- lationship exists between compounding frequency and the nominal and effective annual rates? Case initial deposit Nominal annual rate, Compounding frequency, times/year) Deposit period years 6% $...
If a bank pays a 6% annual percentage rate, with quarterly compounding, on deposits, what effective...
If a bank pays a 6% annual percentage rate, with quarterly compounding, on deposits, what effective annual rate does the bank pay?
Which of the following statements about APR (Annual Percentage Rate) and EAR (Effective Annual Rate) is...
Which of the following statements about APR (Annual Percentage Rate) and EAR (Effective Annual Rate) is NOT true? EAR is usually higher than APR if the compounding frequency is more than annual. EAR is the real interest rate consumer pays. APR considers compounding. Truth-in-lending laws in the U.S. require that lenders disclose an APR on virtually all consumer loans.
Question 9 A nominal annual rate which indicates a compounding frequency: Select one: A. Allows us...
Question 9 A nominal annual rate which indicates a compounding frequency: Select one: A. Allows us to determine the effective rate for any smaller period less than a year, by simply dividing the annual rate by the number of those smaller periods that occur in a year. B. Allows us to determine the effective rate for the period that matches the compounding frequency, by dividing the annual rate by the number of times interest compounds in a year. C. Makes...
if two loans have the same nominal rate but different compounding frequencies, then: a. the effective...
if two loans have the same nominal rate but different compounding frequencies, then: a. the effective rate will have a compounding frequency equal to the frequency of the nominal rate. b. the loan which charges interest more frequently must have the higher effective rate. c. the loans will have the same effective annual rates. d. the effective rate will be lower than the nominal rate for both loans. e. the loan with more frequent compounding will have a lower effective...
Assume a bank offers an effective annual rate of 7.12%. If compounding is quarterly what is...
Assume a bank offers an effective annual rate of 7.12%. If compounding is quarterly what is the APR? Answer format: Percentage Round to: 4 decimal places (Example: 9.2434%, % sign required. Will accept decimal format rounded to 6 decimal places (ex: 0.092434)) Please show all steps for better understanding! Thanks!
For nominal interest rate of compounding is continuous. Show your solution 3. %, effective annual interest...
For nominal interest rate of compounding is continuous. Show your solution 3. %, effective annual interest rate will be 12% when 4. Under what conditions APR will be different from EAR? L. Shark is designing a new account that pays interest quarterly. They wish to pay effectively, a 16% per year on this account. L. Shark desires to advertise the annual percentage rate on this new account (and not the effective rate, since their competitors state their interest on an...
For nominal interest rate of compounding is continuous. Show your solution 3. %, effective annual interest...
For nominal interest rate of compounding is continuous. Show your solution 3. %, effective annual interest rate will be 12% when 4. Under what conditions APR will be different from EAR? L. Shark is designing a new account that pays interest quarterly. They wish to pay effectively, a 16% per year on this account. L. Shark desires to advertise the annual percentage rate on this new account (and not the effective rate, since their competitors state their interest on an...
Compounding frequency, time value, and effective annual rates For each of the cases in the following table,囲 a. Calculate the future value at the end of the specified deposit period b. Determine the effective annual rate, EAR. c. Compare the nominal annual rate, r, to the effective annual rate, EAR. What relationship exists between compounding frequency and the nominal and effective annual rates? a. The future value of case A at the end of year 7 is d to the...
LG 5 P5-37 Compounding frequency, time value, and effective annual rates For each of the cases in the following table: a. Calculate the future value at the end of the specified deposit period. b. Determine the effective annual rate, EAR. c. Compare the nominal annual rate,r, to the effective annual rate, EAR. What re- lationship exists between compounding frequency and the nominal and effective annual rates? Case initial deposit Nominal annual rate, Compounding frequency, times/year) Deposit period years 6% $...
For nominal interest rate of compounding is continuous. Show your solution 3. %, effective annual interest rate will be 12% when 4. Under what conditions APR will be different from EAR? L. Shark is designing a new account that pays interest quarterly. They wish to pay effectively, a 16% per year on this account. L. Shark desires to advertise the annual percentage rate on this new account (and not the effective rate, since their competitors state their interest on an...
For nominal interest rate of compounding is continuous. Show your solution 3. %, effective annual interest rate will be 12% when 4. Under what conditions APR will be different from EAR? L. Shark is designing a new account that pays interest quarterly. They wish to pay effectively, a 16% per year on this account. L. Shark desires to advertise the annual percentage rate on this new account (and not the effective rate, since their competitors state their interest on an...
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