What Is the Effective Annual Interest Rate on a 9

question 32

Multiple Choice

What is the effective annual interest rate on a 9% APR automobile loan that has monthly payments?

• A) 9.00%
• B) 9.38%
• C) 9.81%
• D) 10.94%

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Definitions:

Effective Rate

The annual interest rate that accounts for compounding within the year.

Compounded Annually

The process where interest earned is added to the principal sum once a year, and future interest is earned on the new total.

Compounded Nominal Annual Rate

The rate of interest for one year, without taking inflation into account, which is compounded at specified intervals within that year.

Effective Rate

The actual interest rate on an investment or loan, taking into account the compounding of interest over time.