Let us take APR = 8 %. Now calculate the EAR for continuous compounding.
Annual Percentage Rate, APR = 8% = 0.08
Formula: Effective Annual Rate, EAR = [1+(APR/m)]^{m} - 1
where, m = number of months
∴ EAR = [1+(0.08/m)]^{m} - 1
=> EAR = [1+(0.08/12)]^{12} - 1 [∵1 year = 12 months]
=> EAR = 1.083 - 1 = 0.083
Therefore, EAR = 8.3%
Let us take APR = 6 %. Now calculate the EAR for continuous compounding.
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