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Leto [7]
3 years ago
9

If the interest is compounded more than once per​ year, which rate is​ higher, the stated rate or the effective​ rate?

Business
1 answer:
arlik [135]3 years ago
7 0

Answer:

the effective rate is higher

Explanation:

the formula used to calculate effective rate is: effective rate = (1 + r/n)ⁿ - 1

for example, he stated rate is 6%:

  • if it is compounded annually, the effective rate is 6%
  • if it is compounded semiannually, the effective rate = (1 + 6%/2)² - 1 = 6.09%
  • if it is compounded quarterly, the effective rate = (1 + 6%/4)⁴ - 1 = 6.14%
  • and so on
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