EAR

Came across the following question: If an investment of 4000 dollars will grow to 6520 in 4 years–monthly compounding. What is the EAR. a) 11.2% b)12.3% c) 13.0% I did it like this: PV=4000 FV=6520 N=48 (12*4) CPT for I/Y 1.023073 and multiplied answer by 12 and got 12.27% meaning b). Now according to Schweser the answer in 13% and they used N=4 meaning c). Why is this?

ok i caught my own mistake, these bastards screwed me up with the monthly…pffff

I did it like this: N = 4; PV = 4000; FV = 6520; I/Y = 12.99 ~ 13. Option B will give you a PV of 4,099.48, which is greater than 4000. Option C will give a PV of 3,998.83 ~ 4,000.

What is your I/Y set to? I type in n=4, pv= -4000, fv= 6250, cpt i/y gives me 141.6408 Which problem number/page is that, by the way?

another, easier, solution is (6250/4000)^.25 - 1

Ah that one caught me the first time I tried it, glad to know i’m learning something.

This one is still bugging me: Answer is 12.99% CONTINUOUS compounding. Monthly is 11.8% EAR Is “monthly” even relevent in this problem?

aha…EAR always try and use I/Y fn in the calc… this stuff is so confusing… I need such stupid tricks

If the correct answer is C, this is how I figured it out. n=48,pv=-4000,pmt=0,fv=6520. solve for i. i=1.023073. This is the monthly return (1.023073%). To get EAR. 1.023073%^12=12.99%. Is C for sure the correct answer?

Yes, C is correct. ((6520/4000)^(1/48))^12 = (6520/4000)^.25 “monthly” is just extra info