You plan to invest $2,000 in an individual retirement arrangement (IRA) today at a nominal annual...
Question:
You plan to invest $2,000 in an individual retirement arrangement (IRA) today at a nominal annual rate of 8%, which is expected to apply to all future years.
What is the effective annual rate, EAR, at the end of 10 years if the interest is compounded daily (assume a 365-day year)?
Effective Annual Rate:
The interest rate quoted on financial instruments indicates the nominal interest rate. One can determine the real interest rate after considering the inflation rate and the effective annual rate after considering the frequency of compounding.
Answer and Explanation: 1
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View this answerThe calculated value of the effective annual rate (EAR) is 8.328%.
The daily interest rate is given by:
{eq}= \dfrac{\text{Annual percentage...
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Effective Annual Rate: Formula & Calculations
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Chapter 7 / Lesson 6
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Know the definition of the effective annual rate (EAR), see the formula for calculating the effective annual rate, and explore some examples on how to calculate the effective annual rate.
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