Other things being equal, the more frequent the compounding period, the:
A)Higher the APR
B)Lower the APR
C)Higher the effective annual interest rate
D)Lower the effective annual interest rate

Question

Quizplus · Accepted Answer

The more frequent the compounding period, the higher the effective annual interest rate. This is because with more frequent compounding, the interest is earned not only on the principal but also on the interest earned in previous periods. As a result, the overall return increases, leading to a higher effective annual interest rate. While the APR may increase with more frequent compounding, it is not a direct result of compounding and may be influenced by other factors as well. Therefore, A is not the best choice. Similarly, the lower APR is not a consequence of compounding, and B is incorrect. Finally, the effective annual interest rate is a more comprehensive measure of return, as it accounts for compounding, and is, therefore, the best choice.

Other Things Being Equal, the More Frequent the Compounding Period