Time Value of Money - Leeds School of Business

Compounded quarterly? Compounded monthly? Compounded daily? Answer: The effective annual rate is the annual rate that causes the PV to grow to the same FV as under multi-period compounding. For 12 percent semiannual compounding, the ear is 12.36 percent: EAR = Effective Annual Rate = IF iNom = 12% and interest is compounded semiannually, then: EAR = = (1.06)2 – 1.0 = 1.1236 – 1.0 = … ................
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