The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the ________ rate.

Question

Quizplus · Accepted Answer

The effective annual rate takes into account the compounding effect of the monthly interest and gives an accurate representation of the true cost of the loan over a year. The stated rate (A) only indicates the nominal rate without considering compounding. Discounted annual rate (B) is not a commonly used term in finance. Periodic monthly rate (D) represents the interest charged each month but not the annual rate. Consolidated monthly rate (E) is not a commonly used term in finance.

The Actual Interest Rate on a Loan That Is Compounded