When compounding more than once a year, the true opportunity costs measure of the interest rate is indicated by the:
A) annual percentage rate
B) contract rate
C) stated rate
D) effective annual rate

Question

Quizplus · Accepted Answer

When compounding more than once a year, the effective annual rate (EAR) is the true measure of the interest rate, as it takes into account the compounding effect. The annual percentage rate (APR), contract rate, and stated rate only reflect the nominal interest rate without considering compounding. Therefore, the effective annual rate (EAR) is the best choice for indicating the true opportunity cost of interest rate when compounding occurs more than once a year.

When Compounding More Than Once a Year, the True Opportunity