I am trying to understand the effective interest rate concept with an example. All I know about it is the following formula:
EAR = (1+r/n)^n -1 , where n = number of periods r = stated interest rate
So in my example we have the following:
PV = 1000 Rate annually is 10%
FV in two years would be
FV = PV(1+r)^n = 1000(1+0.10)^2 = 1210
Now if we change the problem to
What will be the FV if interest rate is compounded quarterly?
If the rate is applied quarterly, then should I use the same formula but with n = 8 compounding periods for two years?