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10 November, 10:54

your investment advisor informs you that you do not need to pay a fee for his services. Instead, he invests your money for one month and keeps all of the proceeds before investing it for you. If your advisor makes and keeps a 1% return on your investment, what is his EAR if the earnings rate could be extrapolated for one year?

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  1. 10 November, 13:49
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    Answer: 12.68%

    Explanation:

    The Effective Annual Interest rate is the nominal interest rate adjusted for the number of compounding periods a financial product will experience in a period of time which is usually a year.

    The formula is,

    Effective annual interest rate = (1 + (nominal rate / number of compounding periods)) ^ (number of compounding periods) - 1

    Plugging in the figures would give,

    EAR = (1 + 0.01) ^ 12 - 1

    EAR = 1.01^12 - 1

    EAR = 12.68%

    You might notice that in the bracket I did not divide the 1% by 12. This is because the 1% was already given as the month's interest rate.
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