
Economics Economics Forum  Financial Mathematics, Econometrics, Operations Research, Mathematical Finance, Computational Finance 
 LinkBack  Thread Tools  Display Modes 
April 3rd, 2016, 01:23 AM  #1 
Newbie Joined: Apr 2016 From: Korea Posts: 1 Thanks: 1  Finding Effective Annual Rate (Financial Management Class)
This is a Perpetuity question and I'm having a hard time finding the EAR(Effective Annual Rate) It states the following: Interest rate: 6 % compounded semiannually $100 payed every three months per year So how would you calculate the EAR in this situation? The amount of cash flows per year is greater than the number of compounding per year (PP>CP) Please help........ 
April 3rd, 2016, 05:30 PM  #2  
Math Team Joined: Oct 2011 From: Ottawa Ontario, Canada Posts: 8,752 Thanks: 604  Quote:
r = .06 (annual rate/100) n = 2 (compounding periods) EAR = (1 + r/n)^n  1 = (1 + .06/2)^2  1 = 1.0609  1 = .0609 which means 6.09% If the payment frequency does not match the compounding frequency, then the rate used in order to pay interest on payment dates needs to be calculated, and must result such that it equals the EAR: EAR = .0609 p = 4 (payment frequency) k = required rate (1 + k)^p = 1 + EAR 1 + k = (1 + EAR)^(1/p) k = (1 + EAR)^(1/p)  1 k = 1.0609^(1/4)  1 k = 1.014889...  1 k = .014889... which means ~1.4889% In other words, crediting the interest every 3 months using rate of ~1.4889 results in effective annual rate of 6.09 %  

Tags 
annual, class, effective, financial, finding, management, rate 
Thread Tools  
Display Modes  

Similar Threads  
Thread  Thread Starter  Forum  Replies  Last Post 
Effective rate of interest  jenjenjen  Economics  2  May 6th, 2013 01:10 PM 
Financial and Management Accounting  almazz  Algebra  3  February 15th, 2012 04:52 AM 
Financial and Management Accounting  almazz  Algebra  1  February 12th, 2012 06:29 PM 
Need help using my financial calculator for finance class  courvy  Economics  0  November 5th, 2011 09:13 PM 
effective interest rate. can you help me?  gusty  Economics  0  October 25th, 2008 06:17 AM 