Which of the following statement is False?Group of answer choicesAn annual percentage rate (APR) is the rate that interest earns in one year before the effect of compounding.An APR can’t be used as a discount rate because the APR does not reflect the true amount you will earn in one year.The principal is repaid over the life of an amortising loan.Because the APR does not include the effect of compounding, it is always less than the EAR.
Question
Which of the following statement is False?Group of answer choicesAn annual percentage rate (APR) is the rate that interest earns in one year before the effect of compounding.An APR can’t be used as a discount rate because the APR does not reflect the true amount you will earn in one year.The principal is repaid over the life of an amortising loan.Because the APR does not include the effect of compounding, it is always less than the EAR.
Solution
The false statement is: "Because the APR does not include the effect of compounding, it is always less than the EAR."
Explanation: The Annual Percentage Rate (APR) does not always have to be less than the Effective Annual Rate (EAR). The APR could be less, equal to, or even more than the EAR depending on the frequency of compounding. If there is no compounding within the year (i.e., compounding is annual), then the APR and EAR would be the same. If compounding is more frequent (semi-annual, quarterly, monthly, etc.), then the EAR would be greater than the APR because EAR takes into account the effect of compounding.
Similar Questions
Which of the following statements is FALSE?a.The annual percentage rate indicates the amount of simple interest earned in one year.b.Because interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of our cash flows.c.The effective annual rate indicates the amount of interest that will be earned at the end of one year.d.None of them.e.The annual percentage rate indicates the amount of interest including the effect of compounding.
he annual percentage rate (APR) of a loan is different from the interest rate because it:A.is calculated from the remaining interest owed.B.includes charges and fees.C.includes the rate but not the fees and charges.D.only covers the interest for a year.
Compounding means earning interest on the principal and interest. True False
Which of the following statements is correct?Question 4Answera.An annual percentage rate (APR) does not include the effect of compounding, therefore it is usually higher than EAR.b.EAR is the annual interest rate that would earn the same interest with a quoted annual compounding interest rate.c.EAR refers to the interest earned by cash flows from an investment over a one-year period divided by the number of times that interest is compounded during the year.d.An effective annual rate (EAR) is the rate that interest earns in one year before the effect of compounding.
Suppose that your bank account pays an 8% APR. The interest is compounded quarterly. Which of the following statements is correct?a.The periodic rate of interest is 2% and the effective annual rate is greater than 8%.b.The periodic rate of interest is 4% and the effective annual rate is less than 8%.c.The periodic rate of interest is 8% and the effective annual rate is greater than 8%.d.None of them.e.The periodic rate of interest is 2% and the effective annual rate is 4%.
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