What Is the Effective Annual Rate (EAR)

question 83

Multiple Choice

What is the effective annual rate (EAR) ?

• A) It is the interest rate that would earn the same interest with annual compounding.
• B) It is the ratio of the number of the annual percentage rate to the number of compounding periods per year.
• C) It is the interest rate for an n-year time interval, where n may be more than one year or less than or equal to one year (a fraction).
• D) It refers to the cash flows from an investment over a one-year period divided by the number of times that interest is compounded during the year.

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Definitions:

Notes Receivable

Claims for which formal agreements of credit are made between borrowers and lenders, often involving interest.

Journal Entry

A record that captures all the financial transactions of a business, displaying debits and credits in the accounting system.

Aging Method

An accounting technique used to estimate the amount of a company's bad debts based on the age of its receivables.

Bad Debts Expense

The cost recognized by businesses for uncollectible accounts receivable due to customer defaults.