Page 54 - CFA - Day 1 & 2 Course Notes
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LOS 6.c: Calculate and interpret the Session Unit 2: The Time Value of Money
effective annual rate, given the stated
annual interest rate and the frequency
of compounding.
Example: Computing EAR
Compute EAR if the stated annual rate is 12%, compounded quarterly.
Answer:
Here m = 4, so the periodic rate is 12/4= 3%.
Thus, EAR = (1 + 0.03)4 – 1 = 1.1255 – 1 = 0.1255 = 12.55%.
This solution uses the [yx] key on your financial calculator. The exact keystrokes on
the TI for the above computation are 1.03 [yx] 4 [=] 12.55%
