Asked by Mitchell Brooks on May 13, 2024
Verified
From a lender's point of view, would you rather disclose to borrowers the nominal interest rate or the effective interest rate?
Nominal Interest Rate
The interest rate before adjustments for inflation, representing the rate that banks and other lenders quote.
Effective Interest Rate
The actual interest rate when compounding is accounted for, expressed as an annual rate.
Lender
An individual, a financial institution, or an entity that provides funds to another with the expectation that the funds will be repaid, usually with interest.
- Evaluate various investment or borrowing alternatives by examining their effective interest rates.
Verified Answer
JR
Johan RestrepoMay 19, 2024
Final Answer :
If compounding is more frequent than annual, the effective rate exceeds the nominal rate. Lenders would prefer to disclose the lower nominal rate since most borrowers do not understand the distinction between nominal and effective rates.
Learning Objectives
- Evaluate various investment or borrowing alternatives by examining their effective interest rates.