Final answer:
The statement is false as the effective interest rate accounts for compounding effects and gives a true measure of annual return, contrary to the nominal interest rate which does not consider compounding.
Step-by-step explanation:
The statement that the effective interest rate is the conventional method of stating the annual interest rate is false. The effective interest rate, often referred to as the annual equivalent rate (AER) or annual percentage yield (APY), actually takes into account the effects of compounding over a given period of time. It provides a more accurate measure of the actual rate of return, especially when compared to the nominal or stated interest rate, which does not consider compounding within the year. For instance, if a bond or loan is said to have a 9% nominal interest rate and compounds quarterly, the effective interest rate would actually be higher than 9% due to the compounding effect.
When analyzing financial scenarios, such as the cost of financial capital or the prime interest rate, it is important to distinguish between nominal and effective interest rates to understand the true cost or return of an investment over time.