Question: But if rates are communicated annually, but compounding frequencies differ, how can we compare interest rates? For example, an annual rate of 8% compounded semi-annually

But if rates are communicated annually, but compounding frequencies differ, how

But if rates are communicated annually, but compounding frequencies differ, how can we compare interest rates? For example, an annual rate of 8% compounded semi-annually is different than an annual rate of 7.8% compounded monthly. We can use the Effective Annual Rate (EAR) to compare these two scenarios. Take a look at the EAR formula in section 5-16 and calculate the EAR for the problem below: 11.75% compounded monthly Remember since this is a formula, the interest rate should be used as a decimal, and convert your answer back to a percentage with two decimals (example 5.25%)

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