Question

Relationship between annual effective rate of interest and annual nominal rate of interest is, if frequency of compounding is more than 1,
Select one:
O a. Nominal rate > Effective rate
O b. Nominal rate < Effective rate
O c. Effective rate < Nominal rate
O d. Efective rate = Nominal rate​

Answer 1

Answer:

b.

Explanation:

Answer 2

The correct option is, (a)  Nominal rate > Effective rate.

The nominal annual interest rate is 10%, and the effective annual interest rate is also 10%. However, if compounding is more frequent than once per year, then the effective interest rate will be greater than 10%. The more often compounding occurs, the higher the effective interest rate.

What is the difference between effective interest rate and nominal interest rate?

Nominal interest rate is also defined as a stated interest rate. This interest works according to the simple interest and does not take into account the compounding periods. Effective interest rate is the one which caters the compounding periods during a payment plan.

Hence, Nominal rate > Effective rate is the Relationship between annual effective rate of interest and annual nominal rate of interest.

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