Effective annual rate: Difference between revisions
imported>Doug Williamson m (Spacing) |
imported>Doug Williamson m (Spacing, and link with Real page.) |
||
| Line 2: | Line 2: | ||
1. | 1. | ||
A quoting convention under which interest at the quoted rate is calculated and added to the principal annually. EAR is the usual quotation basis for instruments with maturities of greater than one year. | A quoting convention under which interest at the quoted rate is calculated and added to the principal annually. | ||
EAR is the usual quotation basis for instruments with maturities of greater than one year. | |||
2. | 2. | ||
A conventional measure which expresses the returns on different instruments on a comparable basis. The EAR basis of comparison is the equivalent rate of interest paid and compounded annually, which would give the same all-in rate of return as the instrument under review. | A conventional measure which expresses the returns on different instruments on a comparable basis. | ||
The EAR basis of comparison is the equivalent rate of interest paid and compounded annually, which would give the same all-in rate of return as the instrument under review. | |||
For example GBP overnight interest is conventionally quoted on a simple interest basis for a 365 day year. | For example GBP overnight interest is conventionally quoted on a simple interest basis for a 365 day year. | ||
| Line 14: | Line 20: | ||
(ii) The ''equivalent'' effective annual rate is = 1.00014<sup>365</sup> - 1 = 5.24%. | (ii) The ''equivalent'' effective annual rate is = 1.00014<sup>365</sup> - 1 = 5.24%. | ||
== See also == | == See also == | ||
| Line 26: | Line 33: | ||
* [[Nominal annual rate]] | * [[Nominal annual rate]] | ||
* [[Periodic rate of interest]] | * [[Periodic rate of interest]] | ||
* [[Real]] | |||
* [[Return]] | * [[Return]] | ||
Revision as of 07:22, 14 July 2014
(EAR).
1. A quoting convention under which interest at the quoted rate is calculated and added to the principal annually.
EAR is the usual quotation basis for instruments with maturities of greater than one year.
2.
A conventional measure which expresses the returns on different instruments on a comparable basis.
The EAR basis of comparison is the equivalent rate of interest paid and compounded annually, which would give the same all-in rate of return as the instrument under review.
For example GBP overnight interest is conventionally quoted on a simple interest basis for a 365 day year.
So GBP overnight interest quoted at 5.11% means:
(i) Interest of 5.11%/365 = 0.014% is paid per day.
(ii) The equivalent effective annual rate is = 1.00014365 - 1 = 5.24%.
