Ch 4 - Interest rates

Question 1

What is quoted rate/APR/stated rate?

Answer 1

Interest rates expressed in annualized terms (covers a period of 12 months)

Question 2

What is an effective interest rate?

Answer 2

Interest rate that is actually earned or paid on an investment, loan or other financial products due to the result of compounding over a given period of time

Question 3

Higher the _______, _____ the effective interest rate

Answer 3

Compounding frequency, higher

Question 4

APR is always _______- than the EAR

Answer 4

lower

Question 5

When the compounding frequency is annual, APR and EAR are _____

Answer 5

equal

Question 6

What is continous compounding?

Answer 6

Instead of calculating interest on a finite no of periods, it is calculated over an infinite no of periods

Question 7

What is nominal/ notional interest?

Answer 7

Interest income or expense without accounting for inflation

Question 8

What is real interest rate?

Answer 8

Interest income/expense after accounting for inflation