You should report your answer as a percent with three decimal places.)Ĭ. (Note: The formula will give the EAR as a decimal. Use your table to report the EAR if interest is compounded once each year, monthly, and daily. Make a table that shows how the EAR depends on the number of compounding periods. Would you expect a larger or a smaller EAR if interest is compounded more often? Explain your reasoning.ī. Thus in the formula above, we would use 0.1 in place of APR.Ī. If you borrow money at an annual percentage rate APR (as a decimal), and if interest is compounded n times per year, then the effective annual rate EAR (as a decimal) is given byįor the remainder of this problem, we will assume an APR of 10%. The relationship between the APR and the EAR depends on how often interest is compounded. The calculation is made by adding the interest indicated by the EAR to the amount borrowed. If you borrow money for 1 year and make no payments, then in order to calculate how much you owe at the end of the year, you must use another interest rate, the EAR (the effective annual rate), which is not normally reported on loan agreements. It does not tell directly what the interest rate really is. Recall that the APR (the annual percentage rate) is the percentage rate on a loan that the Truth in Lending Act requires lending institutions to report on loan agreements. … Get solutions Get solutions Get solutions done loading Looking for the textbook? If interest is compounded as often as possible- that is, continuously-then the relationship between APR and EAR is given by Again using an APR of 10%, compare the EAR when the interest is compounded monthly with the EAR when the interest is compounded continuously. If you borrow $5000 and make no payments for 1 year, how much will you owe at the end of a year if interest is compounded monthly? If interest is compounded daily? d. You should report your answer as a percent with three decimal places.) c. Would you expect a larger or a smaller EAR if interest is compounded more often? Explain your reasoning. Thus in the formula above, we would use 0.1 in place of APR.

If you borrow money at an annual percentage rate APR (as a decimal), and if interest is compounded n times per year, then the effective annual rate EAR (as a decimal) is given by For the remainder of this problem, we will assume an APR of 10%. This problem has been solved: Solutions for Chapter 2.1 Problem 9E: APR and EAR Recall that the APR (the annual percentage rate) is the percentage rate on a loan that the Truth in Lending Act requires lending institutions to report on loan agreements.

Apr and ear practice problems