The correct answer is: A. equivalent annual rate.
EAR stands for effective annual rate. It is a measure of the actual annual cost of borrowing money, taking into account compounding. It is calculated by taking the annual percentage rate (APR) and multiplying it by the number of times interest is compounded per year.
For example, if you borrow $1000 at an APR of 10% compounded monthly, your EAR will be 10.47%. This is because you will earn interest on the interest you have already earned, which increases the total amount of interest you pay.
EAR is important to know when making financial decisions, such as whether to take out a loan or invest in a savings account. It can help you compare different offers and make sure you are getting the best deal.
Here is a brief explanation of each option:
- A. equivalent annual rate: This is the correct answer. EAR is a measure of the actual annual cost of borrowing money, taking into account compounding.
- B. equivalent annuity rate: This is not the correct answer. An annuity is a series of equal payments made over a period of time. The equivalent annuity rate is the interest rate that would produce the same future value as the annuity.
- C. equally applied rate: This is not the correct answer. Equally applied rate is a method of calculating interest that is applied equally to the principal amount over the life of the loan.
- D. equal advance rate: This is not the correct answer. Equal advance rate is a method of calculating interest that is applied equally to the principal amount and the interest that has already been accrued.