Frequency of compounding affects both future and present values of cash flows. While we usually start out assuming "annual periods interest and inflation typically compound more frequently. Thus we must always concer ourselves with the effective annual rate (EAR): Rate % t(days) EAR Annual Semi-annual Monthly Daily Continuous 10% 10% 10% 10% 10% 1 2 12 365 n/a 10.0% 10.3% 10.5% 10.5% 10.5% EXCEL NOTATION YOUR INPUTS % Int. Rate Periods/YO n r in 1) -1 EAR = n 0 1 EAR = % 0 ) Frequency of compounding affects both future and present values of cash flows. While we usually start out assuming "annual periods interest and inflation typically compound more frequently. Thus we must always concer ourselves with the effective annual rate (EAR): Rate % t(days) EAR Annual Semi-annual Monthly Daily Continuous 10% 10% 10% 10% 10% 1 2 12 365 n/a 10.0% 10.3% 10.5% 10.5% 10.5% EXCEL NOTATION YOUR INPUTS % Int. Rate Periods/YO n r in 1) -1 EAR = n 0 1 EAR = % 0 )