Which one of the following statements concerning interest rates is correct? Savers would prefer annual compounding over monthly compounding given the same annual percentage rate. The effective annual rate decreases as the number of compounding periods per year increases. The effective annual rate equals the annual percentage rate when interest is compounded annually. Borrowers would prefer monthly compounding over annual compounding given the same annual percentage rate. For any positive rate of interest, the annual percentage rate will always exceed the effective annual rate.

The effective annual rate equals the annual percentage rate when interest is compounded annually.

Explanation:

Let's use an example to find out the correct option

Suppose an investor deposits $1000 at the rate of 10% per annum

the amount the investor would have in a year :

with annual compounding = 1000(1.1) =$1100

with monthly compounding = 1000 (1.008333)^12 = $1,104.71

investors would prefer monthly compounding because it yields the higher interest rate

The effective annual rate- (1 + periodic interest rate)^m :

with annual compounding = 1.1

with quarterly compounding = 1.025^4 = 1.104

Savers would prefer monthly compounding over annual compounding given the same annual percentage rate because it yields higher amounts of money while borrowers would prefer annual compounding.

effective annual rate increases with the number of compounding per year

with monthly compounding =  (1.008333)^12 = 1.105

Effective annual rate is higher with monthly compounding