Question

If Investment A has an effective annual rate (EAR) that is greater than Investment B's EAR, it is possible for Investment A's annual percentage rate (APR) to be less than Investment B's APR.

a. True
b. False

Answer 1

Answer: True

Step-by-step explanation:

It is indeed possible for Investment A's annual percentage rate (APR) to be less than Investment B's APR but the only way that Investment A can have a higher EAR is if it has more compounding periods in the years.

For instance, assume Investment A has an APR of 25% to be compounded daily and Investment B has an APR of 26% to be compounded semi-annually, their EARs would be:

EAR A = (1 + 25%/365)³⁶⁵ - 1

= 28.4%

EAR B = (1 + 26%/2)² - 1

= 27.7%

Proving that APR can be less but EAR will be more.