Question

Thomas has a loan with a nominal interest rate of 6.4624% and an effective interest rate of 6.4715%. Which of the following must be true?

I. The loan has a duration greater than one year.
II. The interest on Thomas’s loan is compounded more than once yearly.
III. The economy was strong when Thomas took out the loan.
a.
I and II
b.
II only
c.
I and III
d.
III only


Please select the best answer from the choices provided

A
B
C
D

Answer 1

B

Reason: The effective annual rate exceeds the nominal rate only if interest is compounded more than once per year. The given rates do not imply anything about the loan’s duration or the state of the economy.