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) if the nominal annual interest rate is 14.9\% compounded quarterly?

16.02\%

14.90\%

15.44\%

15.81\%

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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 over a year, taking into account the effect of compounding. It is calculated using the formula: EAR = (1 + r/n)^n - 1, where r is the nominal annual interest rate, and n is the number of compounding periods per year.

Identify the given values: The nominal annual interest rate (r) is 14.9% or 0.149 in decimal form, and the compounding frequency (n) is quarterly, meaning there are 4 compounding periods per year.

Substitute the values into the EAR formula: EAR = (1 + 0.149/4)^4 - 1. Break this down into smaller steps: first, divide the nominal rate by the number of compounding periods (0.149/4), then add 1 to the result.

Raise the result to the power of the number of compounding periods (4). This step accounts for the effect of compounding over the year.

Subtract 1 from the result to find the Effective Annual Rate (EAR). This final step gives the actual annual interest rate after considering compounding.