The interest rate that measures the true interest rate when compounding occurs more frequently than once a year is called the:
A) annual percentage rate
B) compound rate of interest
C) stated rate of interest
D) effective annual rate

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) takes compounding into account, allowing for an accurate representation of the true cost of borrowing or the true return on investment. The APR, compound rate of interest, and stated rate of interest do not reflect the impact of compounding.

The Interest Rate That Measures the True Interest Rate When