which one of the following scenarios requires calculation and use of the effective interest rate from the…

which one of the following scenarios requires calculation and use of the effective interest rate from the nominal interest rate when calculating the present or future worth of a series of uniform periodic cash flows?\na. when the frequency of the cash flows is equal to the frequency of interest compounding\nb. when interest compounding occurs more frequently than the periodic cash flows\nc. when the periodic cash flows occur more frequently than interest compounding

which one of the following scenarios requires calculation and use of the effective interest rate from the nominal interest rate when calculating the present or future worth of a series of uniform periodic cash flows?\na. when the frequency of the cash flows is equal to the frequency of interest compounding\nb. when interest compounding occurs more frequently than the periodic cash flows\nc. when the periodic cash flows occur more frequently than interest compounding

Answer

Brief Explanations:

When interest compounding occurs more frequently than the periodic cash - flows, the nominal interest rate needs to be converted to an effective interest rate to account for the compounding effects when calculating present or future worth of cash - flows. In option A, when they are equal, no such conversion is needed. In option C, the situation is different and doesn't require this conversion in the same way.

Answer:

B. When interest compounding occurs more frequently than the periodic cash flows