What is the end-of-year wealth if Vicki Bogan receives an APR of 24 percent compounded monthly on a $1 investment?

Using Equation 4.6, her wealth is:

The annual rate of return is 26.82 percent. This annual rate of return is called either the effective annual rate (EAR) or the effective annual yield (EAY). Due to compounding, the effective annual interest rate is greater than the APR of 24 percent. Algebraically, we can write the effective annual interest rate as follows:

Students are often bothered by the subtraction of 1 in Equation 4.7. Note that end-of-year wealth is composed of both the interest earned over the year and the original principal. We remove the original principal by subtracting 1 in Equation 4.7.

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12 .24 $1(1 + €) = = $1 × 1.0212 12 = $1.2682