Question

What term describes the rate that directly accounts for the compounding effects over the number of conversion periods within a year?

a) Simple interest rate
b) Nominal interest rate
c) Effective interest rate
d) Annual percentage rate (APR)

Answer 1

The term that describes the rate that directly accounts for the compounding effects over the number of conversion periods within a year is Effective interest rate. It takes into consideration the compounding of interest over time.

Step-by-step explanation:

The term that describes the rate that directly accounts for the compounding effects over the number of conversion periods within a year is Effective interest rate.

Effective interest rate takes into consideration the compounding of interest over time. It represents the true interest rate earned or paid on an investment or debt.

For example, if you have a savings account with a nominal interest rate of 5% and it compounds quarterly (4 times a year), then the effective interest rate will be higher than 5% because the interest is reinvested multiple times within the year.