Question

When calculating the effective rate of a loan, which statement or statements must be true if n is greater than 1? I. The length of the loan is greater than a single year. II. The effective rate will exceed the nominal rate. III. The interest will be compounded monthly. A. II only b. II and III c. I and III d. I, II, and III.

Answer 1

When calculating the loan's effective rate, the most accurate statement is that the effective rate will exceed the nominal rate.

Effective Annual Rate:

The interest rate for the entire year is known as the effective annual rate (EAR). Interest charges are incurred when a company uses debt or capital leases to fund its operations.

Interest is reported on the income statement, but it can also be generated on an investment or paid on a loan over time due to compounding interest.

It is frequently larger than the marginal rate and is used to compare various financial products with different compounding periods, such as weekly, monthly, and yearly.

The effective yearly interest rate rises over time as the number of compounding periods increases.

Therefore, the correct option is A.

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Answer 2

Answer: Yes, the option is indeed A. II only.