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22 March, 06:22

Which of the following statements is (are) true:

I. The nominal interest rate is also referred to as the APR or the stated rate.

II. You should use the nominal interest rate to compare two alternative investments/loans with different compounding periods.

I only II only Both I and II are correct

Neither I nor II are correct

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Answers (1)
  1. 22 March, 06:33
    0
    Neither I nor II are correct

    Explanation:

    I. The nominal interest rate is also referred to as the APR or the stated rate.

    This statement is not true because nominal interest rate is different from the annual percentage rate (APR).

    A nominal interest rate is basically the interest rate is charged by banks or other financial institutions on a loan, and other expenses on the loan are not added to the interest when interest rate is being determined.

    On the other hand, APR is nominal interest rate plus other expenses incurred in other to get the loan.

    Therefore, nominal interest rate is usually lower than the APR. This makes them to be different.

    II. You should use the nominal interest rate to compare two alternative investments/loans with different compounding periods.

    This statement is not correct.

    The interest rate is used to to compare two alternative investments/loans with different compounding periods is the effective interest rate.

    The effective interest rate is the actual amount of interest rate that a lender or an investor earned on his loan, investment because of compounding that is done during a specific period of time. The effective annual interest rate is the interest rate that is employed to compare different investment products because, unlike other interest rate, compounded interest are estimated differently by it.

    Therefore, Neither I nor II are correct.

    I wish you the best.
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