Answer:
The question is incomplete; the complete question is given as follows:
The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the _____ rate.
A) stated
B) discounted annual
C) effective annual
D) periodic monthly
E) consolidated monthly
Answer:
C) effective annual
Explanation:
Nominal Interest Rate: This is the interest quoted by a financial institution for a loan or investment contract. This rate is usually qouted per annum but interest can be compounded at a period exactly equal to or less than a year
Effective Annual Rate; Where interest is compounded at period shorter that than a year the equavilant annual interest rate is called the effective annual interest rate.
For example, if a loan is quoted to be 8% per annum but interest is compounded monthly, the borrower will actually be paying more than a 8% per anum. The equivalent actual annual interest rate the borrower will pay is called the effective annual interest rate (EAR).
It can be calculated using the formula below:
EAR =( (1+r/m)^(m×n) -)
r= nominal interest rate per anum, m- number of compounding period in a year, n- number of years
EAR = (1+0.08/12)^(12× 1) - 1
= 8.30%
Note that the compounding period is monthy, and there are 12 months in a year, so m = 12 and the year n = 1
You obeserve that the effective annual interest rate for a nominal rate of 8% if compounding is done monthly is higher than 8%
