Please help understanding EAR rates

Hi Everyone I cannot understand the calculation of EAR. Please help.

Ritu, can you post a specific question relating to EAR? maybe we can explain with an example…

EAR, like effective annual rate? If the uncompounded rate is 5% = 0.05 then the EAR for monthly compounding would be (1+ 0.05/12)^12 - 1 = whatever (too lazy)

JoeyDVivre Wrote: ------------------------------------------------------- > = whatever (too lazy) If only this was a valid selection on the exam. Let’s make it Choice C by default. Joey, we’ve got to get you promoted from the exam grading department up to test design. I’ll sign the petition :slight_smile:

I would actually like to do that…

JDV Q1: Select the most appropriate statement: CFAI and schweser statistics material a) is very good b) is occasionally a bit off, but generally good. c) contains far too many inaccuracies to be taken seriously d) was written by satan himself to annoy JDV JDV Q2: Rumplestiltskin, CFA works as an equity analyst for a large bank. He overhears the CFO of Slartibartfast, Inc, a company on which he currently has a buy recommendation, saying they are having big trouble securing new financing, and will go under if they don’t find new backers soon. He immediately sells all his stock in the company, then changes his recommendation to sell, but states his reason for changing his recommendation as “Smelliness of CEO’s dog demoralising staff”. Rumplestiltskin has: a) violated standard [A, B] regarding MNPI b) violated standard [C, D] regarding diligence and reasonable basis. c) violated standard [E, F] regarding priority of transactions d) bloody ethics bloody PCP grrr…

Q1: CFAI: C Schweser: D except we need a stronger word than “annoy” Q2: a - c, I suppose for CFAI. In the real world, Rump would be fired for front-running his clients who might even successfully sue him and his company. He absolutely shouldn’t be front-running his own recommendations. He might be in trouble with the SEC not because of the overheard conversation (assuming he didn’t overhear it while visiting Slartiblast or something) but because his disclosure of the information will move the stock and he is misappropriating the information from his own firm (this is Carpenter vs US). If he just changes his recommendation to sell and doesn’t give any reason (and your reason is akin to telling everyone there is something fishy going on that he doesn’t want to discuss) he would be fine (this is Dirks vs SEC).

So in Schweser Notes there is a question:

Given daily compounding, the growth of 5 000 invested for one year at 12% interest will be closest to?

Accourding to the question I need to find FV in one year so the formula must be FV=PV(1+r)n

PV = 5000

(1+r)n = (1+12/365)365*1

FV=5000*(1+12/365)365*1 but I can’t compute this one

and if i check the answer there will be

N = 1* 365 I/Y 12/365

PMT = 0 PV= - 5000 CPT - (arrow) and the answer is 5 637

I press all these numbers ( press N = 1* 365, then I/Y = 12/365 …) but still I cant get the answer.

What am I doing wrong?

^ Try the following (for the BAII):

P/Y=1 C/Y=365


N=1 I =12 PV = 5000 CPT FV

Should be -5,637.373 (negative means outflow)

thank you this helped

but my mathematical formula of calculation is right?

In your mathematical calc, it should be (1+r)n = (1+ 0.12 /365)365*1

You have to convert the 12% to decimal, otherwise you’re adding 1200%.


I tried this however I am getting FV = $5600 instead of $5,537 :sob: what am I doing wrong?!


Check your C/Y: it should be 365.

If you are using this:

P/Y=1 C/Y=365 how do I get the FV after? am I meant to still put -5000 for PV

so sorry can you provide the steps as to how you calculate it! still not getting it :sob:

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I finally worked out what I had done wrong, thanks again!!

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