aanchalb

[aanchalb]

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Yea. thanx.
this really helps.

One thing though, how would we calculate z or t values? Will we hav tables? Or can we rely on not being tested on such calculations?

[aanchalb]

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For instance:
“A bank promises that with its monthly compounding plan, a $10,000 deposit today will grow into $15,000 in 4.5 years. What must be the annual percentage rate (APR) and the effective annual rate (EAR) on this account?
(a) APR= 9.43% EAR= 9.04%
(b) APR= 9.43% EAR= 9.84%
(c) APR= 9.04% EAR= 9.43%”
what i thought was n=54, pv=10000 fv=15000, so i=.75. hence, ear= 9.04
and i reasoned that this has to be ear because ear is that rate of intt u earn effectively including the compounding,
so i went with a.
correct answer was c.

so, if not that, what is bey?

[aanchalb]

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i am taking the june test.
what do u mean by valuation models?

[aanchalb]

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@vincentt could u explain by what logic did u deduce that the 9.429% u calculated is ear? (because by taking n as 4.5, u did not take the effect of compounding, so how is it ear?)
what is wrong with my reasoning?

[aanchalb]

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so according to me,
Stated rate of interest, a.k.a APR is the annual rate of simple interest.
EAR is the effective rate of interest which is just stated rate but compounded interest.
therefore, EAR will be greater than APR, as it accounts for interest on interest.

Am i even remotely close to the real concept?
My whole understanding on this tiny topic is the reason all my numerical questions are incorrect.

[aanchalb]

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@vincentt yes this helps.
Thank u so much.

[aanchalb]

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i am new to cfa.
so, with the risk of sounding naive, what is eoc?

[aanchalb]

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right. thanx.

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