Machine-translated by Google. Questions are authored in English.
Top

Discussion

When the compounding period is shorter than the payment period, the correct approach is to

  • A.find the effective rate for the payment period
  • B.use the nominal annual rate directly
  • C.ignore the compounding within the payment period
  • D.divide the nominal rate by the number of payments

Answer: A

Correct answer: find the effective rate for the payment period

The factors assume that interest is compounded once per payment period, so where compounding is more frequent the nominal rate must first be converted into the effective rate over the payment period. Using the nominal rate directly understates the interest, and the error grows with the frequency of compounding.

No comment is present. Be the first to comment.
Loading…

Post your comment

Please log in or register to post a comment.