Unformatted text preview: s rates. Review Questions
4–12 What effect does compounding interest more frequently than annually
have on (a) future value and (b) the effective annual rate (EAR)? Why?
4–13 How does the future value of a deposit subject to continuous compounding compare to the value obtained by annual compounding?
4–14 Differentiate between a nominal annual rate and an effective annual rate
(EAR). Define annual percentage rate (APR) and annual percentage yield
11. The effective annual rate for this extreme case can be found by using the following equation:
EAR (continuous compounding) ek 1 (4.21a) For the 8% nominal annual rate (k 0.08), substitution into Equation 4.21a results in an effective
annual rate of
e0.08 1 1.0833 1 0.0833 8.33% in the case of continuous compounding. This is the highest effective annual rate attainable with an
8% nominal rate. 160 PART 2 Important Financial Concepts LG6 Special Applications of Time Value
Future value and present value techniques have a number of important applications in finance. We’ll study four of them in this section: (1) deposits neede...
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