Multiple Choice
Which of the following equations correctly computes the present value (PV) of a single future cash flow (FV) to be received in \(n\) periods, discounted at an annual interest rate \(r\)?
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10. Time Value of Money
Time Value of Money Equations
Multiple Choice
Which term refers to the interest rate expressed as if it were compounded once per year, regardless of the actual compounding frequency?
A
Nominal Rate
B
Effective Annual Rate (EAR)
C
Periodic Rate
D
Annual Percentage Rate (APR)
Verified step by step guidance1
Understand the key terms provided in the problem: Nominal Rate, Effective Annual Rate (EAR), Periodic Rate, and Annual Percentage Rate (APR). Each term has a specific meaning in financial accounting and is used in different contexts.
Recall that the Nominal Rate refers to the stated interest rate before considering compounding effects. It does not account for the frequency of compounding.
The Effective Annual Rate (EAR) accounts for the compounding frequency and expresses the interest rate as if it were compounded annually. It is calculated using the formula: , where r is the nominal rate and n is the number of compounding periods per year.
The Periodic Rate is the interest rate applied to each compounding period. It is calculated by dividing the nominal rate by the number of compounding periods per year: .
The Annual Percentage Rate (APR) is the term that refers to the interest rate expressed as if it were compounded once per year, regardless of the actual compounding frequency. It is often used for comparison purposes and does not account for the effects of compounding within the year.
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