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Sir what’s the difference between effective annual interest rate and compound interest rate
The effective annual interest rate is the yearly rate.
The compound interest rate may be given for any period. For example, you could be given a compound interest rate of 2% per month (and then be expect to calculate the effective annual rate).
So compound interest can be based on monthly or yearly
And interest is based on principal amount plus interest .On the other hand
effective annual interest rate is the yearly rate
And when we say effective annual interest rate it means it does not compound meaningThe EAR is only based on the principle amount and is only calculated for 1 year or 1 and a half year as well or even 2 years …as long as it’s more than a year
Then we can call it EAR .Am I correct sir
Compound interest rates can be quoted for any period – maybe monthly, maybe two monthly, or whatever).
The effective annual rate is arrived at using compounding as I explain in my lectures.
An equivalent annual interest rate is always for a year. Annual means year.
So that means
We must use ONLy the compounding rate in order to arrive at effective annual interest rate ?And there’s no way to calculate the EAR without using the compounding rate
Am I correct sir
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