Question

MEDAL - A bank pays 4% nominal annual interest on special three-year certificates. What's the effective annual interest rate if interest is compounded every three mo?

(1 + .04/4) - 1
But what about the three year crap?
[(1 + .04/4) - 1]*3?


http://img.tfd.com/mgh/Investopedia/Effective_Annual_Interest_Rate.png

Answer 1

Hmmm
\[EAR=\left (1+\frac{r}{m} \right )^m-1\]
where m is the compounding frequency per year. SInce its compounded ever 3 months thats another way of saying its compounded quarterly.

Now thats the effective annual rate for a single year
Now it states a special 3 year certificate meaning this occurs for 3 years
So basically its the EAR to the power of 3
\[\left (\left (1+\frac{r}{m} \right )^m-1 \right) ^3\]
This equation will give you the amount of interest you will receive over a 3 yr period

Answer 2

Hmmm
\[EAR=\left (1+\frac{r}{m} \right )^m-1\]
where m is the compounding frequency per year. SInce its compounded ever 3 months thats another way of saying its compounded quarterly.

Now thats the effective annual rate for a single year
Now it states a special 3 year certificate meaning this occurs for 3 years
So basically its the EAR to the power of 3
\[\left (\left (1+\frac{r}{m} \right )^m-1 \right) ^3\]
This equation will give you the amount of interest you will receive over a 3 yr period

Answer 3

I tried replying but .... i cldnt post it

Answer 4

Are you sure it's cubed?

Answer 5

what were you thinking of????
adding???

Answer 6

no, multiplying; didn't you see it in the question?

Answer 7

Thats basically adding
EAR+EAR+EAR=3*[EAR}
Ya may be right ... I just wanna think abt this

Answer 8

Give me a couple of minutes
I wanna work this out in my brain

Answer 9

Hey im just wondering why u tryna figure out over 3 years?
It just asks you for EAR for one particular yr

Answer 10

lmao red herring
EAR means the overall interest just for that particular year and the EAR is simply the formula I stated above

Answer 11

\[EAR=\left (1+\frac{r}{m} \right )^m-1\]

Answer 12

I think i wld disagree with you for multiplying EAR by 3 to find the annual interest for the 3 yr period
I think i would Multiply EAR*EAR*EAR=EAR^3
But I cant seem to find a reason logically but im gonna think abt this

Answer 13

I'll just cube it. I have one last question to get done with anyway...
after eliassaab goes...

Answer 14

You can practice similar problems on
http://www.saab.org/actuarialmuorg.cgi
chose exam FM

Answer 15

ohhhh yayyyyy :)

Answer 16

What does C,MLC FM and P stand for?

Answer 17

ohhhh It for Actuarial
Got anything for CFA exams?

Answer 18

@eliassaab some of these questions are above my level but im gonna bookmark it and try to complete like in a week or 2 when im slightly more knowledgeable
Thanks

Answer 19

It was a red herring--I asked my professor today

Answer 20

No, nothing for CFA