For compounding more frequently than annual, the effective interest rate Select one: a. is higher than the nominal rate b. is lower than the nominal rate c. depends on the amount borrowed d. equal to the nominal rate

For compounding more frequently than annual, the effective interest rate Select one: a. is higher than the nominal rate b. is lower than the nominal rate c. depends on the amount borrowed d. equal to the nominal rate

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter7: Types And Costs Of Financial Capital

Section: Chapter Questions

Problem 2EP

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Concept explainers

Swaps

A swap is a derivative contract in which two parties are agreed to exchange their cash flows from two different financial instruments for a defined period. In swap contracts, cash flows from one financial instrument are fixed and cash flow from other financial instruments is variable based on the interest rate, exchange rate, and commodity price. Swap contracts are transacted in an over-the-counter system. Swap contracts are utilized to hedge risk and mitigate loss.

Question

For compounding more frequently than annual, the effective interest rate
Select one:
a. is higher than the nominal rate
b. is lower than the nominal rate
c. depends on the amount borrowed
18
d. equal to the nominal rate

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