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


I think it's a

Answer 1

Choice A is correct

Explanation:

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