What is the EAR if the APR is 5% and compounding is quarterly?
A) Slightly above 5.09%
B) Slightly below 5.09%
C) Under 5.00%
D) Over 5.25%
Answer: A
Explanation: A) Using the EAR formula, we get 5.0945%, or slightly above 5.09%.
EAR = [(1 + APR/m)m] -1 = [(1 + .05/4)4] - 1 = 5.0945%.
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