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Finding the Equivalent Annual Annuity (EAA)is a Good Way to Deal

question 65

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Finding the equivalent annual annuity (EAA)is a good way to deal with projects with unequal lives and should only be used with mutually exclusive projects.


Definitions:

Contract Rate

The agreed-upon interest rate specified in a contract, often relating to loans or bond issues.

Effective Rate

The interest rate on a loan or financial product, rephrased to reflect the actual annual cost of the product over its repayment term.

Bond Discount

The difference between the bond's face value and its selling price when it is sold for less than its face value, representing the additional interest expense to the issuer.

Unamortized Discount

The portion of a bond discount that has not yet been amortized (gradually written off) over the period of the bond's life.

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