For a given stated annual rate, the effective annual rate (EAR): can be found by

ID: 2757677 • Letter: F

Question

For a given stated annual rate, the effective annual rate (EAR):

can be found by dividing the stated rate by the number of compounding periods

is at a minimum when interest is continuously compounded

is greater in all cases

decreases if the number of compounding periods is greater than the number of holding periods

increases as compounding frequency increases

can be found by dividing the stated rate by the number of compounding periods

is at a minimum when interest is continuously compounded

is greater in all cases

decreases if the number of compounding periods is greater than the number of holding periods

increases as compounding frequency increases

Formula for effective annual rate is given below.

EAR = (1+APR÷n)^n-1

n is number of compounding per year

From this formula we can say that, effective interest rate increases, as number of compounding increases.

Option (E) increases as compounding frequency increases is correct answer.

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