Question

Orlando has a loan with an effective interest rate of 7. 918%, compounded annually. Which of the following must be true? I. In the effective rate formula, n is equal to one. II. The nominal rate is 7. 918%. III. The Federal Funds Rate is static. A. I and II b. II only c. III only d. I, II, and III.

Answer 1

The correct option is B,  II. only.

Given to us,

I. In the effective rate formula, n is equal to one.

Effective interest rate formula,

$r = (1 + \dfrac{i}{n} )^n - 1.$

where,

r is the effective interest rate,

i is the stated interest rate,

n is the number of compounding periods per year.

According to the question the compounding periods per year is not given to us. Also, loans are taken for a longer period of time.

Thus, we can conclude that statement is false.

II. The nominal rate is 7. 918%.

nominal rate = real interest rate + inflation rate,

but as it is not mentioned in the question about the inflation rate. the statement is true to us. Assuming the inflation rate is 0%.

Thus, we can conclude that statement is true.

III. The Federal Funds Rate is static.

This statement is false, as the no information is given about this statement also this can not be concluded through assumption.

Thus, we can conclude that statement is false.

Hence, The correct option is B,  II. only.

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