If interest is compounded daily, then
A)the annual percentage rate (APR)is greater than the effective annual rate (AER).
B)the investor will earn less interest than if interest were compounded monthly instead.
C)the annual percentage rate (APR)is lower than the effective annual rate (AER).
D)the annual percentage rate (APR)is equal to the effective annual rate (AER).

Question

Quizplus · Accepted Answer

When interest is compounded daily, the compounding frequency is higher than if interest were compounded monthly. As a result, the effective annual rate (AER) will be higher than the annual percentage rate (APR). Therefore, option C is correct. When interest is compounded daily, the effective annual rate (AER) is higher than the annual percentage rate (APR). This is because with daily compounding, interest is being earned on the principal amount plus any previously earned interest every single day, resulting in greater overall earnings. As a result, the APR will be lower than the AER when interest is compounded daily.

If Interest Is Compounded Daily, Then