Question

The effective rate, $r_e$ equivalent to the nominal rate $r$ converted $m$ times a year is given by:

• A. $\left(1+\frac{r}{m}\right)$
• B. $\left(1+\frac{r}{m}\right)^m$
• C. $\left(1+\frac{r}{m}\right)^m+1$
• D. $\left(1+\frac{r}{m}\right)^m-1$

Hint:

Logic Tip: Effective annual rate is always greater than nominal rate when compounding occurs more than once a year.

Answer 1

The Correct Option is D