Final answer:
An effective interest rate is useful for comparing the annual interest rates of interest rates with different compounding periods. It helps determine the true cost or profitability of financial products or investments.
Step-by-step explanation:
An effective interest rate is useful for comparing the annual interest rates of interest rates with different compounding periods. It allows us to determine the true cost or profitability of various financial products or investments. The effective interest rate takes into account the compounding frequency and reflects the total amount of interest accumulated over a given period. For example, if you are comparing two bank accounts, one with an annual compounding period and another with a monthly compounding period, the effective interest rate will help you determine which account offers a higher return.