Effective percentage rate for various compounding periods: We have seen that in spite of its name, the annual percentage rate (APR) does not generally tell directly how much interest accrues on a loan...

Effective percentage rate for various compounding periods: We have seen that in spite of its name, the annual percentage rate (APR) does not generally tell directly how much interest accrues on a loan in a year. That value, known as the effective annual rate,17 or EAR, depends on how often the interest is compounded. Consider a loan with an annual percentage rate of 12%. The following table gives the EAR, E = E(n), if interest is compounded n times each year. For example, there are 8760 hours in a year, so that column corresponds to compounding each hour.

a. State in everyday language the type of compounding that each row represents. b. Explain in practical terms what E(12) means and give its value. c. Use the table to calculate the interest accrued in 1 year on an $8000 loan if the APR is 12% and interest is compounded daily. d. Estimate the EAR if compounding is done continuously—that is, if interest is added at each moment in time. Explain your reasoning.