You notice a local consumer finance company is offering 20% APR loans, but compounds interest continuously. What is the EAR?

Question

Quizplus · Accepted Answer

The Effective Annual Rate (EAR) can be calculated for continuously compounded interest using the formula EAR = e^r - 1, where r is the annual interest rate as a decimal. For a 20% APR, r = 0.20. Plugging this into the formula gives EAR = e^0.20 - 1 ≈ 0.2214 or 22.14%.

You Notice a Local Consumer Finance Company Is Offering 20