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Part 2 Bond Valuation and Interest Rates Exercise 1: APR and EAR Practice 1 APR and EAR Practice 1 APR-period rate m APR (Q)-The Annual Percentage Rate (APR) is the annual rate required to reported by law. This is the same as the rate that we have been using all semester (r). It is equal to the period rate (rate per period) multiplied by the number of period per year (m). The APR does not capture the effect of compounding. EAR The Effective Annual Rate EAR (EAR) is an annual interest rate that reflects the effect of compounding. An EAR will always be higher than APR if the number of compounding periods per year is greater than 1. an period rate- this is the rate per period. For example, monthly rate, daily rate, weekly rate. We have already been working with the period rate. Recall that if we were looking at an annuity with month payments and an annuarateof5% To use the annuity formula, we would divide the annual rate of 6% by 12 to get a monthly rate of .596. This is the period rate. Remember that when calculating EAR or APR, we are calculating ANNUAL rates. Therefore, m is "m"- number of compounding periods per year. always the number of periods PER YEAR. Practice: I. if a credit card charges a rate of 24.99% per year with daily compounding, what rate are you actually paying? 2. If an investment pays 14% per year with monthly compounding, what rate are you actually earning? Your aunt gave you $300 to purchase a text book. You are going to pay her back $325 in 5 months. What is m? What is the period rate? What is the APR? What is the EAR? 3. 4. You paid your $100 phone bill 10 days late and were charged a $15 late fee. What is the APR? What is the EAR