Question

Thomas has a loan with a nominal interest rate of 6. 4624% and an effective interest rate of 6. 4715%. Which of the following must be true? I. The loan has a duration greater than one year. II. The interest on Thomas’s loan is compounded more than once yearly. III. The economy was strong when Thomas took out the loan. A. I and II b. II only c. I and III d. III only.

Answer 1

The effective interest rate has been higher than the nominal interest rate because compounding is performed more than once yearly. Hence, statement II is true. Thus, option B is correct.

The nominal interest rate has been the percentage interest paid by the borrower to the principal amount before inflation. The effective interest rate has been the actual return or the rate at the time of compounding the amount of the loan.

Effective interest rate

Thomas has an effective interest rate of 6.4715%, while the nominal interest rate has been 6.4624%. The effective interest rate has been higher than the nominal interest rate for Thomas.

This has been accomplished when the interest has been paid frequently or semi quarterly, resulting in the compounding more than once yearly. Hence, statement II is true. Thus, option B is correct.

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