PPT Slide

• Effective Annual Rate (EAR = EFF%):

The annual rate which causes PV to grow to the same FV as under multiperiod compounding.

Example: EFF% for 10%, semiannual:

FV = (1.05)2 = 1.1025.

EFF% = 10.25% because

(1.1025)1 = 1.1025.

Any PV would grow to same FV at 10.25% annually or 10% semiannually.

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