Question

20.Which one of the following has the lowest effective annual rate?

a. 6 percent compounded annually

b. 6 percent compounded semiannually

c. 6 percent compounded quarterly

d. 6 percent compounded daily

21.If the market interest rate falls, bond priceswill _____

.a.fall

b.remain unchanged

c.rised.

d. fluctuate violently

Answer 1

Effective annual rate is the interest rate that is adjusted for number of compounding during a year.

More the compounding per period higher the effective interest rate

a.6%-Annually

n=1

=6%

b.6% compounded semiannually

n =2 times a year

6.09%

c.6% compounded quarterly

n=4 times a year

6.14%

d.6% daily

n=365 days

6.18%

Thus,6% compounded annually has lowest effective interest rate

(Lower number of compounding in a period= lower effective interest rate)

Answer A)

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