EAR vs APR - EARvs.APR Matchthetimeperiods...

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EAR vs. APR
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Match the time periods When solving cash flow problems, you  must make sure that your cash flows and  your discount rate have the same time  script If you have annual CFs, you need an effective  annual rate  If you have monthly CFs you need an  effective monthly rate Etc.
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Finding the right rate Some problems are easy: you get monthly  CFs and an APR with monthly compounding.  Divide the APR by 12 to get the effective  monthly rate, and match it with your monthly  CFs. You are done. Another example: you have annual CFs and  you are given an EAR (or simply told that the  rate is x%--no mention of a compounding  period). Use the effective annual rate with  your annual CFs. You are done.
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Finding the right rate But it often is not that easy: you are given  CFs and a rate from different time frames. Most common mistake: annual CFs and 
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This note was uploaded on 09/24/2011 for the course HADM 2225 taught by Professor Wellman, j during the Spring '08 term at Cornell University (Engineering School).

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EAR vs APR - EARvs.APR Matchthetimeperiods...

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