EAR and Periodic rate

CFA Level I
#1

Hello!
Could you explain me when I need to use periodic rate in annuity formula and when EAR instead.
For example, in this task it is annuity with PMT 700, N 4, I/Y=EAR 2.018. But why here I cannot use the following: PMT 700, N 4*12=48, I/Y 2/12 (periodic rate)
Task: “A client invests €20,000 in a four-year certificate of deposit (CD) that annually pays interest of 3.5%. The annual CD interest payments are automatically reinvested in a separate savings account at a stated annual interest rate of 2% compounded monthly.”

I am puzzled when I need to use periodic rate (2%/12 with N 4 years*12 months) and when EAR of 2.018% and N=4 years.

Thank you!

#2

You need to be consistent between the PMT, N and I/Y entries otherwise the compounding is not working correctly.
If there are regular payments = PMT get this correct first
Here the payments are yearly so I/Y should be a yearly number
N should represent years

If the payments were, for example, monthly then you would use I/Y as a monthly rate and N should represent the number of months

#3

Mikey, thank you very much! I got it.

#4