Effective annual rate (EAR) is ………… annual percentage rate (APR) when interest is paid many times a year.

Question

BlackTom AI · Accepted Answer

When comparing EAR and APR, it's important to recall how compounding frequency affects the effective rate. 
Option 1: 'None of the above' would be incorrect because there is a clear relationship between EAR and APR when compounding occurs multiple times per year. The statement is not accurate in this context. 
Option 2: 'Equal to' is not generally true unless interest is compounded exactly once per year. Since interest is paid many times a year in the scenario, EAR will diverge from APR. 
Option 3: 'Greater than' reflects the standard result: if interest is compounded more frequently than annually, the EAR exceeds the quoted APR because interest accrues on interest within each year, effectively boosting the annual yield. This aligns with the mathematical definition of EAR = (1 + APR/m)^{m} − 1 for m > 1, which yields a value above APR itself. 
Option 4: 'Less than' would be incorrect because more frequent compounding cannot reduce the effective annual rate below the nominal APR; the compounding effect increases the total growth within the year. 
In summary, only the statement asserting that EAR is greater than APR when interest is paid multiple times a year is consistent with standard time value of money principles and the formula for EAR under periodic compounding.

25400 Financial Literacy - Spring 2025 🔴 Practice Questions 1 EAR and APR

Effective annual rate (EAR) is ………… annual percentage rate (APR) when interest is paid many times a year.

View Explanation

Log in for full answers

Similar Questions

In August 2021, which type of consumer loan had the HIGHEST interest rate?

Question at position 17 In exchange for partial payment of a property’s income, a lender would most likely offer a higher interest rate?TrueFalse

A _ APR will result in a _ true cost of credit.

Which of the following statement is true?

Which one of the following statements concerning interest rates is correct?

Which one of the following statements concerning interest rates is correct?

The Federal Reserve Bank, or the Fed, is able to adjust which interest rate?

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler

25400 Financial Literacy - Spring 2025 🔴 Practice Questions 1 EAR and APR

Effective annual rate (EAR) is ………… annual percentage rate (APR) when interest is paid many times a year.

View Explanation

Log in for full answers

Similar Questions

In August 2021, which type of consumer loan had the HIGHEST interest rate?

Question at position 17 In exchange for partial payment of a property’s income, a lender would most likely offer a higher interest rate?TrueFalse

A _______ APR will result in a _______ true cost of credit.

Which of the following statement is true?

Which one of the following statements concerning interest rates is correct?

Which one of the following statements concerning interest rates is correct?

The Federal Reserve Bank, or the Fed, is able to adjust which interest rate?

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

A _ APR will result in a _ true cost of credit.