Final answer:
The contractual interest rate is stated as an annual rate, which standardizes the way interest rates are expressed. Savings accounts generally have slightly lower interest rates than CDs due to the liquidity trade-off. When valuing future payments, investors also consider opportunity costs and potential risk premiums.
Step-by-step explanation:
The contractual interest rate is always stated as an annual rate. This is the standardized method to express the interest rate, although the actual interest may be calculated and applied on a different basis, such as monthly, daily, or semiannually.
When considering investment opportunities such as Certificates of Deposit (CDs), one needs to understand that the interest rates for savings accounts are typically slightly lower than the CD rate. This is because financial investors expect a higher rate as compensation for locking their funds away for a set period, thus sacrificing liquidity.
Furthermore, when a financial investor assesses what future payments are worth in the present, they must decide on an interest rate that reflects the opportunity cost of investing capital and includes a risk premium if necessary. In some cases, they might choose a rate as high as 15% to value these future payments, depending on the perceived risk and available investment opportunities.
Therefore answer is O annual rate.