Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?
A) Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually.Deposits in Bank B will provide the higher future value if you leave your funds on deposit.
B) The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.
C) A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.
D) A bank loan's nominal interest rate will always be equal to or less than its effective annual rate.
E) If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) takes into account the effects of compounding within the year, so if there is any compounding (more than once a year), the EAR will be higher than the nominal rate.

Which of the Following Statements Is CORRECT, Assuming Positive Interest