- CFA Exams
- CFA Exam: Level I 2021
- Study Session 2. Quantitative Methods (1)
- Reading 6. The Time Value of Money
- Subject 2. Calculate the Effective Annual Rate

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**CFA Practice Question**

You borrow $10,000 at 8% to finance a new car. The loan will be paid back over 3 years of monthly payments. Your effective rate of interest would be closest to ______.

B. 8.24%

C. 8.30%

A. 8.00%

B. 8.24%

C. 8.30%

Correct Answer: C

With monthly payments, interest will be charged on a monthly basis. The effective interest rate is the stated rate compounded monthly: r = (1 + 0.08/12)

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**User Contributed Comments**
16

User |
Comment |
---|---|

Pooh |
Remember EAR accounts for periodic compounding. |

jimmymh |
it's easier if you just plug it in your calculator, 2nd iconv, Nom=8, C/Y=12, Eff=CPT |

tcole135 |
for HP 12c in RPN mode 8 enter 12 n divide i chs pmt fv |

mansi |
for BA ll plus 2nd iconv 2nd clr work nom=8 enter and down arrow eff= enter and down arrow c/y=12 enter and down arrow and bring it to EFF now press compute |

HeroEarth |
Effective annual rate (EAR) is the annual rate of interest that takes full account of compounding within the year. Will this always be the case? "within the year" always 1? the 3 years from the question threw me off.. |

Ratego |
It is always easier to use the calc.but you need to understand the concept of what you are calculating |

SANTOSHPRABHU |
For BAII Plus format to decimals places to 5 or more, 0.08/12=0.0066667 + 1 = 1.0066667 yx 12 = 1.0829995 - 1 = 0.0829995 X 100 = 8.29995 = 8.30% |

pokigbo |
HP12c Platinum keystrokes 8 ENTER 12 [N][/][i][CHS][PMT][FV] |

alester83 |
Hero, to answer your question rates are always based on an annual basis. how they are stated will vary depending on the periods (semi, quarterly, etc.) |

nabilhjeily |
i calculated based on 36 that is 3 * 12 and it still worked well |

bettywei |
how to use caculator? |

abs013 |
NOM =8 C/Y = 12*3 = 36 EFF = 8.31 Is this still correct? |

012905nv |
If you were compounding daily, what is the correct way to enter that in the Texas Instrutments BAII? C/Y=365? |

ibrahim18 |
@012985nv, yes 365 |

Sm7272 |
@ abs013 : Effective rate is 8.2999. It is incorrect to consider 36 as no. of periods. |

MELONICA |
Is it incorrect to consider m=36 in the question? |