As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan).

Question

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This is because compounding involves adding interest earned on previous interest, resulting in a higher total interest earned over a year than if the interest was only calculated once at the end of the year using the nominal rate.

As a Result of Compounding, the Effective Annual Rate on a Bank