Final answer:
The effective rate of interest is not the contractual rate, but rather the actual rate considering factors like compounding and fees.
Step-by-step explanation:
The statement that the effective rate of interest is the contractual rate of interest charged by a lender or promised by a borrower is false. The effective rate of interest refers to the actual rate of interest earned or paid on an investment, taking into account factors such as compounding and fees.
To calculate the effective rate of interest, one needs to consider the nominal interest rate, the compounding frequency, and any additional fees associated with the investment. For example, if a borrower takes out a loan with a nominal interest rate of 5% compounded annually, but there are additional fees of 2% of the loan amount, the effective rate of interest will be higher than 5%.
Therefore, it is important for both lenders and borrowers to understand the effective rate of interest to accurately assess the cost of borrowing or the returns on investments.