Is this statement true or false? The effective annual rate is > than the annual percentage...

Is this statement true or false? The effective annual rate is > than the annual percentage rate. Explain your answer.

Expert Solution

The given statement that " The effective annula rate is > than the annual percentage rate" is True.

Explanation:

The effective rate is calculated by taking the no. of compounding a year in consideration whereas the annual percentage rate just quotes a yearly percentage rate regardless of compounding in a year.

In order to explain the given statement lets take an example where annual percentage rate is 10%. Now assume semi-annual compounding, effective rate will be;

= (1+Nominal rate/m)^m - 1

= (1+ 0.10/2)^2 -1

= (1.05)^2 -1

= 1.1025 - 1

= 0.1025 or 10.25%

So, from the above calculation it can be seen that the effective annual rate is > than the annual percentage rate.

jeff jeffy answered 2 years ago

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