PRC-2 · Chapter 4 · Question 34 of 60
What does the 'Effective Annual Rate' (EAR) represent in finance?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) The annual interest rate including the impact of compounding within the year.
Explanation
The effective rate provides the 'true' annual cost or return. It accounts for the fact that compounding more frequently (e.g., monthly) results in a higher final yield than a simple nominal annual rate.
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