Question

An interest rate is an effective rate under all of the following conditions, except when:

(a) The compounding period is not stated
(b) The interest period and compounding period
are the same
(c) The interest statement says that the interest
rate is effective
(d) The interest period is shorter than the com-
pounding period

Answer 1

Option D i.e.the interest period is shorter than the compounding period.

The annual interest rate typically quoted on loans or investments is the nominal interest rate—the periodic rate before compounding has been taken into account. The effective interest rate is the actual interest rate after the effects of compounding have been included in the calculation.At a given annual interest rate, your money grows faster as the compounding period becomes shorter.The more often compounding occurs, the higher the effective interest rate.