Question

When calculating the effective rate of a loan, which statement or statements must be true if n is equal to 1? I. The nominal rate equals the effective rate. II. The length of the loan is exactly one year. III. The interest is compounded annually. A. I and III b. II and III c. I only d. III only.

Answer 1

The correct statement is, ''The nominal rate equals the effective rate'' and it can be determined by using properties of Annual Percentage Rate.

Given that,

When calculating the effective rate of a loan,

We have to determine,

Which statement or statements must be true if n is equal to 1?

According to the question,

Effective Interest Rate;

When calculating the effective rate of interest of a loan, the nominal rate of interest will be equal to the effective rate, and the interest is compounded annually in the event that n is equal to 1.

If the duration of the loan, n, is 1 then the nominal rate and the effective rate will always be equal. Moreover, the interest rate charged on the loan is usually stated as an Annual Percentage Rate (APR) of charge compounded annually.

1. The nominal rate equals the effective rate.

The nominal interest rate does not take into account the compounding period, while the effective rate does.

Therefore, the statement is true.

2. The length of the loan is exactly one year.

The length of the loan may or may not exactly be 1 year, because, in n = 1, n may be quarterly or yearly.

Therefore, this statement is not true.

3. The interest is compounded annually.

The length of the loan may or may not exactly be 1 year, because, in n = 1, n may be quarterly or yearly.

Therefore, this statement is not true.

For more details, Interest Rate refers to the link given below.

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