Asked by Thomas Ramirez on May 11, 2024
Verified
Which is the best definition of an effective annual rate?
A) The interest rate charged per period multiplied by the number of periods per year.
B) An annuity for which the cash flows occur at the beginning of the period.
C) A level stream of cash flows for a fixed period of time.
D) The interest rate expressed as if it were compounded once per year.
E) The interest rate expressed in terms of the interest payment made each period. Also, quoted interest rate
Effective Annual Rate
The actual rate of interest on an investment or loan, taking into account the effect of compounding over a given period.
Compounded
A method of calculating interest where the earned interest on an investment is added to the principal, and future interest is calculated on the total amount.
- Familiarize yourself with the impact that compounding has on the effective annual rate (EAR) and how it diverges from the annual percentage rate (APR).
Verified Answer
UU
Unapologetic UnicornMay 16, 2024
Final Answer :
D
Explanation :
The effective annual rate (EAR) is the interest rate expressed as if it were compounded once per year, which accounts for the effect of compounding over the period.
Learning Objectives
- Familiarize yourself with the impact that compounding has on the effective annual rate (EAR) and how it diverges from the annual percentage rate (APR).