The effective annual rate is equal to:

Question

Quizplus · Accepted Answer

The effective annual rate formula is [1 + Quoted rate/m]m-1, where m represents the number of compounding periods per year. This formula takes into account the effect of compounding on the interest rate, giving a more accurate measure of the true rate over a year. Option A is incorrect because it includes t and r, which are not included in the EAR formula. Option B is incorrect because it only considers the effect of compounding, not the original quoted rate. Option C is incorrect because it multiplies the APR by m, which overstates the true rate. Option E includes [r], which is not part of the EAR formula.

The Effective Annual Rate Is Equal To