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

Answer 1

Answer: a. I and III

Explanation: n = 1 means one compounding period per year (interest compounded annually). With annual compounding, the effective annual rate equals the nominal annual rate, but n = 1 says nothing about the loan’s total length in years.