The correct way to annualize an interest rate is to compute the effective annual interest rate.

Question

Quizplus · Accepted Answer

To properly annualize an interest rate, one must calculate the percentage increase over the course of a year. This is done by computing the effective annual interest rate, which takes into account any compounding periods within the year. Simply multiplying the interest rate by the number of periods in a year does not accurately reflect the true rate of return.

The Correct Way to Annualize an Interest Rate Is to Compute