1215

Which of the following is the most accurate statement about stated and effective annual interest rates?

A) The stated annual interest rate is used to find the effective annual rate.

B) The stated rate adjusts for the frequency of compounding.

C) So long as interest is compounded more than once a year, the stated annual rate will always be more than the effective rate.

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The effective annual rate, not the stated rate, adjusts for the frequency of compounding. The nominal, stated, and stated annual rates are all the same thing.

1215

A major brokerage house is currently selling an investment product that offers an 8% rate of return, compounded monthly. Based on this information, it follows that this investment has:

A) an effective annual rate of 8.00%.

B) a stated rate of 0.830%.

C) a periodic interest rate of 0.667%.

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Periodic rate = 8.0 / 12 = 0.667. Stated rate is 8.0% and effective rate is 8.30%.