Calculating EAR, APR, Effective Interest Rate, Retirement Saving
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1) Your savings account offers monthly compounding. If your money doubles in 5 years what is the EAR and APR on the account?
2) The Jet Co. has an $80,000 line of credit with a 12% interest rate and a 10% compensating balance requirement which is based on the total amount borrowed. What is the effective annual interest rate if the firm needs $45,000 of cash for one year?
3) You are saving for your retirement in 20 years. You hope to have an annual income of $80,000 per year (at the beginning of each year). At retirement you will have a life expectancy of 25 years and when you die you plan to leave $100,000 to your Community Foundation Fund. Upon retirement, all of your funds will earn a 7% EAR.
You have a defined contribution retirement plan in which your employer invests $1,000 per month. The account pays a 9% APR with monthly compounding. The balance of your retirement savings will come from your annual (end of year) contributions into an investment account that pays an 11% EAR.
How much money do you need when you retire in 30 years?
How much do you need to set aside each year to meet your retirement goal?
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Solution Summary
The solution examines EAR, APR, effective interest rates and retirement savings calculations.
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QUESTION 1
Time 5 years
Term monthly compounding
# of compounding period 12 per year
60 total
Interest 100% at the end of 5 years
Monthly Annual
EAR 1.24% 14.87%
APR 1.16% 13.94%
Procedures
1. Compute monthly APR
2. Multiply monthly APR by 12 to get annual APR.
3. Compute annual EAR from annual APR
4. ...
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