Question

When calculating the effective rate of a loan, which statement or statements must be true if n is equal to 1?

I. The nominal rate equals the effective rate.
II. The length of the loan is exactly one year.
III. The interest is compounded annually.
a.
I and III
b.
II and III
c.
I only
d.
III only

THE ANSWER IS A ON EDG.

Answer 1

The answer is : a. I and III

Explanation:

• The effective rate of a loan (let's call it "e") can be calculated as:
  `e=(1+(i)/(n))^n-1`, where "i" is the nominal interest rate, and "n" is the number of compounding periods per year.
• When n equals one (n=1), which means that the number of compunding periods per year equals one (it compounds anually), then
  `e=(1+(i)/(1))^1-1=i`.

• Therefore , the anual nominal rate equals the effective rate (
  `e=i`) when the interests compund anually.