Identify the correct expression for the effective annual rate (EAR).
A)(1 + Periodic rate of interest)Number of borrowing (interest) periods in one year - 1
B)(1 / Periodic rate of interest)Number of borrowing (interest) periods in one year - 1
C)(1 - Periodic rate of interest)Number of borrowing (interest) periods in one year - 1
D)(1 + Periodic rate of interest)Number of borrowing (interest) periods in one year + 1
E)(1 - Periodic rate of interest)Number of borrowing (interest) periods in one year + 1

Question

Identify the correct expression for the effective annual rate (EAR). 
A)(1 + Periodic rate of interest)Number of borrowing (interest) periods in one year - 1
B)(1 / Periodic rate of interest)Number of borrowing (interest) periods in one year - 1
C)(1 - Periodic rate of interest)Number of borrowing (interest) periods in one year - 1
D)(1 + Periodic rate of interest)Number of borrowing (interest) periods in one year + 1
E)(1 - Periodic rate of interest)Number of borrowing (interest) periods in one year + 1

Quizplus · Accepted Answer

The correct expression for the effective annual rate (EAR) is given by $ (1 + \text{Periodic rate of interest})^{\text{Number of borrowing (interest) periods in one year}} - 1 $, which matches option A. This formula accounts for the effect of compounding interest over the number of periods in a year.

Identify the Correct Expression for the Effective Annual Rate (EAR)