Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

10. Time Value of Money

Time Value of Money Equations

Financial Accounting

10. Time Value of Money

Time Value of Money Equations

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Multiple Choice

What is the effective annual rate (EAR) for an investment that pays 10\% interest compounded annually?

9.5\%

9.09\%

10.25\%

10\%

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Verified step by step guidance

Understand the concept of Effective Annual Rate (EAR): EAR is the actual interest rate earned or paid on an investment or loan after accounting for compounding over a year. It is calculated using the formula: EAR = (1 + r/n)^n - 1, where r is the nominal interest rate and n is the number of compounding periods per year.

Identify the given values: In this problem, the nominal interest rate (r) is 10% or 0.10, and the compounding frequency (n) is 1 since the interest is compounded annually.

Substitute the values into the EAR formula: EAR = (1 + 0.10/1)^1 - 1. This simplifies to EAR = (1 + 0.10)^1 - 1.

Simplify the expression inside the parentheses: Add 1 to 0.10, resulting in EAR = (1.10)^1 - 1.

Interpret the result: Since the interest is compounded annually, the EAR is equal to the nominal interest rate, which is 10%. This confirms the correct answer provided in the problem.