Questions: An effective annual rate must be greater than an annual percentage rate. (A) True (B) False

An effective annual rate must be greater than an annual percentage rate. (A) True (B) False
Transcript text: An effective annual rate must be greater than an annual percentage rate. (A) True (B) False
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Solution

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The answer is (A) True.

Explanation:

  • The Effective Annual Rate (EAR) accounts for compounding within the year, while the Annual Percentage Rate (APR) does not.
  • When interest is compounded more than once a year, the EAR will be greater than the APR because it reflects the impact of compounding.
  • Therefore, the statement that an effective annual rate must be greater than an annual percentage rate is true.
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