Which of the following statements is CORRECT?
A) an investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.
B) the present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due.
C) if a loan has a nominal annual rate of 7%, then the effective rate will never be less than 7%.
D) if a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
E) the proportion of the payment that goes toward interest on a fully amortized loan increases over time.

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) accounts for compounding within the year, so it will be equal to or greater than the nominal rate. If compounding occurs more frequently than annually, the EAR will be greater than the nominal rate.

Which of the Following Statements Is CORRECT