If the effective rate of the note is higher than the nominal rate, the initial amount of the note will result into a discount.Group of answer choicesTrueFalse
Question
If the effective rate of the note is higher than the nominal rate, the initial amount of the note will result into a discount.
Group of answer choices
True
False
Solution
Analysis
-
Understanding Key Terms:
- Effective Rate: The actual interest rate earned or paid over a period, taking into account compounding.
- Nominal Rate: The stated interest rate without adjusting for inflation or compounding.
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Relation Between Rates:
- If the effective rate is higher than the nominal rate, it implies that the cost of borrowing is greater than what is stated, which can be indicative of a discount on the note's value.
Conclusion
Since a higher effective rate suggests that the note is worth less than its stated value (nominal rate), this scenario results in a discount.
Final Answer
True
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