Final answer:
The correct statement is that the effective annual rate can be used to compare loans with different compounding frequencies. This rate includes the effects of compounding and makes an accurate comparison of financial products with different compounding periods possible.
Step-by-step explanation:
When examining the correct statement concerning interest rates, the option (d) 'An effective annual rate can be used to compare loans with different compounding frequencies' is accurate. The effective annual rate (EAR) accounts for the effects of compounding within a year and provides a basis for comparing the real annual cost of loans or the effective yield on investments, regardless of the number of compounding periods. In contrast, the annual percentage rate (APR) represents the nominal annual rate and does not necessarily account for the compounding periods within the year. However, it is true that as the number of compounding periods per year increases, the gap between the APR and EAR widens because interest is being compounded more frequently.
The interest rates on savings accounts and certificates of deposit (CD rates) are connected to these concepts. Savings rates are typically lower than CD rates because liquidity is sacrificed when funds are locked in for a set term in a CD. Moreover, compound interest, which is interest on both the initial principal and the accumulated interest from previous periods, can significantly increase savings over time, emphasizing the importance of understanding how interest rates work.