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Use EAR or APR to (interest rates are denoted in yearly) to get the interest rate per
period.
Assume there are n periods per year (e.g., 12 periods per year means one month per
period; 4 periods per year means three months per period), interest rate per compounding
period is
(1 + EAR) (1/n) 1
For example, if there are 12 periods per year (one month per period),
For example, if there are 4 periods per year (three months per period),
For example, if there are 2 periods per year (6 months per period),
For example, if there is 1 period per year (one year per period),
[Note: Very often, APR is the quote interest rate (meaning the interest rate you can see in
newspaper). However, APR does not take into account compounding. In real life, we earn
and pay interests based on compounding.]
Assume there are n periods per year (e.g., 12 periods per year means one month per
period; 4 periods per year means three months per period), interest rate per compounding
period is
For example, if there are 12 periods per year (three month per period),
For example, if there are 4 periods per year (three month per period),
For example, if there are 2 periods per year (six month per period),
For example, if there is 1 period per year (one year per period),
[Therefore, if in our timeline, the period is one year, using APR or EAR is the same.]
Therefore, EAR is different from APR. Every time, you have a timeline (a stream of cash
flows), we need a rate that stands for one period. Then, you may have EAR rate or
APR rate. Please use the way I showed in the above to obtain the rate per period.
Then, we can use the rate per period to do compounding or discounting.