Homework 2 Topic 3
Formulas
m = number of periods in a year (for example, if monthy, m = 12).
If you know the APR:
Periodic rate = APR/m
EAR = (1 + (APR/m))m – 1
If you know the periodic interest rate:
APR = periodic rate x m
EAR = (1 + periodic rate)m – 1
If you know the EAR (APY):
Periodic rate = (1 + EAR)(1/m) – 1
APR = [(1 + EAR)(1/m) – 1 ] x m Homework problems:
1. You are told that the interest rate is “10% compounded quarterly”. Find the APR, the periodic interest rate, and the APY.
2. The APR is 9% compounded semiannually. Find the EAR and the periodic interest rate.
3. The periodic interest rate is 1% each month. Find the EAR and the APR.
4. The EAR is 7%. Find the APY. What is the equivalent APR with monthly compounding? What is the corresponding periodic (monthly) interest rate?
5. You are told that the interest rate is “7% compounded daily”. Find the APR, the periodic interest rate, and the EAR.
6. The APR is 10% compounded monthly. Find the APY and the periodic interest rate.
7. The periodic interest rate is 4% each six months. Find the APY and the APR.
8. The APY is 5%. Find the EAR. What is the equivalent APR with quarterly compounding? What is the corresponding periodic (quarterly) interest rate?
