Question

Question 9

A nominal annual rate which indicates a compounding frequency:

Select one:

A. Allows us to determine the effective rate for any smaller period less than a year, by simply dividing the annual rate by the number of those smaller periods that occur in a year.

B. Allows us to determine the effective rate for the period that matches the compounding frequency, by dividing the annual rate by the number of times interest compounds in a year.

C. Makes it impossible to determine the effective rate for periods smaller than a year.

D. Only allows us to determine the effective annual rate but not effective rates for smaller periods.

Answer 1

The answer is

D.only allows us to determine the effectoce annual rate but not effective rates for smaller periods

Effective annual rate = (1+nominal rate/number of compounding periods)^number of periods -1

Hence, annual effective rate can be determined but not for smaller periods