- CFA Exams
- CFA Level I Exam
- Study Session 2. Quantitative Methods (1)
- Reading 6. The Time Value of Money
- Subject 2. Calculate the Effective Annual Rate

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**CFA Practice Question**

Which of the following statements is (are) TRUE?

II. The periodic rate is the quoted interest rate per period and is equal to the stated annual interest rate divided by the number of compounding periods per year.

III. The effective annual rate is the amount to which a unit of currency will grow in a year with interest on interest included.

I. The stated interest rate is a quoted interest rate that does not account for compounding within the year.

II. The periodic rate is the quoted interest rate per period and is equal to the stated annual interest rate divided by the number of compounding periods per year.

III. The effective annual rate is the amount to which a unit of currency will grow in a year with interest on interest included.

A. II and III

B. I and III

C. I, II and III

**Explanation:**They are definitions.

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**User Contributed Comments**
3

User |
Comment |
---|---|

armanaziz |
How can EAR be an "amount"? Obviously incorrect wording - isn't it? |

nike |
it's correct. Notice the "unit". All rates is some amount per unit. |

andrei82 |
I'm absolutely agree that "amount" is confusing, but since statement III is in ALL possible answers its better don't waste your time reading it :-) |