Which of the following statements is most correct?
A) If annual compounding is used,the effective annual rate equals the simple rate.
B) If annual compounding is used,the effective annual rate equals the periodic rate.
C) If a loan has a 12 percent simple rate with semiannual compounding,its effective annual rate is equal to 11/66 percent.
D) Both answers a and b are correct.
E) Both answers a and c are correct.

Question

Quizplus · Accepted Answer

When annual compounding is used, the effective annual rate (EAR) does indeed equal the nominal or stated rate (simple rate), because there is no compounding within the year to increase the effective yield. Additionally, since the compounding period is annual, the periodic rate (the rate for each compounding period) also equals the nominal rate, as there is only one period per year. Therefore, both statements A and B are correct, making D the most correct choice.

Which of the Following Statements Is Most Correct