APRs must be converted to the appropriate periodic rates when compounding is ________.
A)more frequent than once a year
B)less frequent than once a year
C)more frequent than once a month
D)less frequent than once every six months

Question

Quizplus · Accepted Answer

When compounding is more frequent than once a year, APRs must be converted to the appropriate periodic rates. This is because the interest earned on a loan or investment can compound daily, weekly, bi-weekly, monthly, quarterly, semi-annually, or annually, depending on the terms of the agreement. The periodic rate reflects the effect of compounding on the nominal interest rate and helps borrowers or investors compare different offers or analyze the cost of debt or the return on investment. Therefore, if a loan has an APR of 12%, but interest is compounded monthly, the periodic rate is 1% per month (12%/12), and the effective annual rate (EAR) is higher than 12%.

APRs Must Be Converted to the Appropriate Periodic Rates When