Convert a yield of 1.736% compounded monthly to an effective annual rate.

To convert a nominal interest rate compounded monthly to an effective annual rate (EAR), you can use the following formula:

\[
\text{Effective Annual Rate (EAR)} = \left(1 + \frac{r}{n}\right)^n - 1
\]

Where:
- \( r \) is the nominal annual interest rate (expressed as a decimal).
- \( n \) is the number of compounding periods per year.

Given:
- \( r = 1.736\% = 0.01736 \)
- \( n = 12 \) (since it's compounded monthly)

Let's calculate the EAR:

\[
\text{EAR} = \left(1 + \frac{0.01736}{12}\right)^{12} - 1
\]

Now, let's compute this.The effective annual rate (EAR) is approximately **1.7499%**.

Would you like more details on this calculation or have any other questions?

Here are five related questions:
1. How does the frequency of compounding affect the effective annual rate?
2. What is the difference between nominal and effective interest rates?
3. How would the EAR change if the interest were compounded quarterly instead of monthly?
4. Can you convert an EAR back to a nominal rate compounded monthly?
5. What would be the EAR if the nominal rate were 5% compounded monthly?

**Tip:** Always express interest rates as decimals when using formulas to avoid calculation errors.

Learn how to convert a nominal interest rate of 1.736% compounded monthly to an effective annual rate (EAR). Follow our step-by-step calculation guide using the EAR formula. Understand the impact of compounding frequency on interest rates. Ideal for financial students and professionals.

Math Problem Statement

Solution

Ask a new question for Free

By Image

Math Problem Analysis

Mathematical Concepts

Formulas

Theorems

Suitable Grade Level

Related Recommendation