Which of the following statements concerning the effective annual rate are corre

Question

Which of the following statements concerning the effective annual rate are correct?

I. When making financial decisions, you should compare annual percentage rates rather than effective annual rates .
II. The more frequently interest is compounded, the higher the effective annual rate given a fixed annual percentage rate.
III. A quoted rate of 6 percent compounded monthly has a higher effective annual rate than if the rate were compounded daily.
IV. When choosing a savings account, you should select the offer with the highest effective annual rate.

Explanation / Answer

Annual percentage rates dont offer a clear picture. You need to consider the effective rate. Some rates are compounded annually; some are compounded quarterly and other even monthly. The premise here is that at every new iteration your principal amount increases and the more often you compound the more you will gain for the same annual interest rate.

If you annual interest rate is 12% and it is compunded annually you will get 12% more than your initial investment.

If you annual interest rate is 12% and it is compunded semi anually then you will get 6% compounded twice.

If you annual interest rate is 12% and it is compunded quarterly then you will get 3% compounded four times.

From the above the correct option is option B

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