Final answer:
The effective interest rate considers the effects of compounding and additional fees, thus it can be different from the nominal interest rate. The true statement about effective interest rate is that it accounts for compounding and fees.
Step-by-step explanation:
The question you've asked pertains to understanding what the effective interest rate is. To answer which statement is true of an effective interest rate: option 2) It takes into account compounding and fees is the most accurate. The effective interest rate, indeed, considers the effects of compounding within the payment period, which can include monthly, quarterly, or yearly compounding. It may also reflect fees or additional costs associated with the loan or investment. However, we cannot affirm without condition that it is always higher than the nominal rate (option 3) because it depends on the frequency of compounding; more frequent compounding yields a higher effective rate.
To clarify with an example, if you have a nominal interest rate of 6% compounded annually, the effective rate would also be 6%. But if that interest is compounded semi-annually, the effective rate would be higher. Compounding can drastically affect the growth of savings over time, illustrating the dramatic effects of compound interest and growth rates on financial investments.