Which of the following statements concerning the effective annual rate are correct?
I.When borrowing and choosing which loan to accept,you should select the offer with the highest effective annual rate.
II.The more frequently interest is compounded,the higher the effective annual rate.
III.A quoted rate of 6% compounded continuously has a higher effective annual rate than if the rate were compounded daily.
IV.When making financial decisions,you should compare effective annual rates rather than annual percentage rates.

Question

Quizplus · Accepted Answer

Statement II is correct because more frequent compounding increases the effective annual rate. Statement III is correct because continuous compounding results in a higher effective annual rate than daily compounding. Statement IV is correct because effective annual rates account for compounding and provide a more accurate basis for comparison. Statement I is incorrect because you should select the offer with the lowest effective annual rate when borrowing.

Which of the Following Statements Concerning the Effective Annual Rate