Effective Annual Rate and Interest Calculations

The video tutorial explores the concept of effective annual rate (EAR) by comparing two banks offering different interest rates and compounding frequencies. It explains how to calculate EAR to determine which bank offers a better deal. The tutorial also introduces continuous compounding, providing formulas and examples to illustrate these financial concepts.

If you have $100,000 to save, which bank offers a higher nominal interest rate?

• Piggy Bank

• Porky Bank

• Both offer the same rate

• Neither offers interest

What is the purpose of calculating the Effective Annual Rate (EAR)?

• To compare different interest rates on a common basis

• To determine the total amount saved

• To find the principal amount

• To calculate monthly payments

How is the monthly interest rate for Piggy Bank calculated?

• By dividing the annual rate by 6

• By multiplying the annual rate by 12

• By adding 1% to the annual rate

• By dividing the annual rate by 12

What is the Effective Annual Rate (EAR) for Piggy Bank?

• 5.10%

• 4.95%

• 5.06%

• 5.00%

Which bank offers a higher Effective Annual Rate (EAR)?

• Neither offers an EAR

• Piggy Bank

• Both offer the same EAR

• Porky Bank

What happens to the Effective Annual Rate as the compounding frequency increases?

• It increases

• It remains the same

• It becomes zero

• It decreases

What is the formula for continuous compounding?

• e plus R

• R times e

• R divided by e

• e to the power R minus one

What is the approximate value of the mathematical constant e?

• 2.5

• 1.618

• 2.718

• 3.14

What should you do after learning these formulas?

• Ignore them

• Forget them immediately

• Use them only once

• Remember them for future use

Where can you find more videos like this one?

• On a social media platform

• In a textbook

• On Prep Nuggets website

• At the local library