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

Question

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The effective annual rate (EAR) takes into account the compounding effect within a year, and as a result, it is often higher than the nominal rate (or stated rate) which does not account for compounding.

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