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CHAPTER 6-2

# CHAPTER 6-2 - EAR =[1(APR m]m 1 EAR =[1.08 4]4 1 =.0824 or...

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EAR = [1 + (APR / m )] m – 1 EAR = [1 + (.08 / 4)] 4 – 1 = .0824 or 8.24% EAR = [1 + (.16 / 12)] 12 – 1 = .1723 or 17.23% EAR = [1 + (.12 / 365)] 365 – 1 = .1275 or 12.75% To find the EAR with continuous compounding, we use the equation: EAR = e q – 1 EAR = e .15 – 1 = .1618 or 16.18% 13. Here we are given the EAR and need to find the APR. Using the equation for discrete compounding: EAR = [1 + (APR / m )] m – 1 We can now solve for the APR. Doing so, we get: APR = m [(1 + EAR) 1/ m – 1] EAR = .0860 = [1 + (APR / 2)] 2 – 1 APR = 2[(1.0860) 1/2 – 1] = .0842 or 8.42% EAR = .1980 = [1 + (APR / 12)] 12 – 1 APR = 12[(1.1980) 1/12 – 1] = .1820 or 18.20% EAR = .0940 = [1 + (APR / 52)] 52 – 1 APR = 52[(1.0940) 1/52 – 1] = .0899 or 8.99% Solving the continuous compounding EAR equation: EAR = e q – 1 We get: APR = ln(1 + EAR) APR = ln(1 + .1650) APR = .1527 or 15.27% 14. For discrete compounding, to find the EAR, we use the equation: EAR = [1 + (APR / m )] m – 1 So, for each bank, the EAR is:
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