Which one of the following statements is correct?

Understanding the Difference Between APR and EAR

When it comes to loans and investments, understanding the difference between the Annual Percentage Rate (APR) and the Effective Annual Rate (EAR) is crucial. Let's take a closer look at the following statements and determine which one is correct:

The correct statement is that the EAR, rather than the APR, should be used to compare both investment and loan options.

The Effective Annual Rate (EAR) takes into account the compounding of interest over time and provides a more accurate measure of the actual rate paid or earned on a loan or investment. On the other hand, the Annual Percentage Rate (APR) is a simple interest rate that does not consider the compounding effect.

Option d) states that the EAR, rather than the APR, should be used to compare both investment and loan options, which is correct. When comparing different investment or loan options, it is important to consider the compounding effect, as it can significantly impact the overall return or cost.

The APR, as mentioned in option c), is not always the best measure of the actual rate paid on a loan because it does not account for compounding. The APR is a standardized measure that allows for easier comparison between different loan offers, but it may not reflect the true cost of borrowing.

Option a) provides an incorrect formula for calculating the APR on a monthly loan. Option b) is also incorrect as the APR and EAR are different measures. Lastly, option e) is not always true as the relationship between the EAR and APR depends on the specific loan or investment terms.