The return actually earned on an investment over a year is known as the ________rate

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BlackTom AI · Accepted Answer

The question asks about the return actually earned on an investment over a year, which is best described by the way we account for compounding effects over that period.
Option a: nominal. The nominal rate is the stated annual rate without adjusting for inflation or compounding within the year; it ignores the effect of intra-year compounding, so it does not precisely reflect the actual return earned over the year.
Option b: real. The real rate adjusts for inflation, showing purchasing power changes, not specifically the raw annual return due to compounding or the gross earnings over a year.
Option c: effective. The effective rate (often called the effective annual rate or EAR) represents the true annual return by incorporating the effect of compounding within the year, aligning with the idea of the return actually earned over a year.
Option d: simple. The simple rate uses simple interest without compounding, which underestimates or overestimates the year’s earnings when interest is reinvested, so it does not capture the true annual return when compounding occurs.
Thus, the statement that the return actually earned on an investment over a year is the effective rate aligns with the concept of compounding-adjusted annual yield.

MCD2170 - T2 - 2025 Key Concept 5 video quiz

The return actually earned on an investment over a year is known as the ________rate

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