Your uncle is considering opening a bank account. His friends who already have bank accounts say many things to him about interest rates that confuses him so he finally plucks some courage and asks you for help. He wants to know which of the following phrases on interest rates is most correct?

Multiple Choice

• The annual percentage rate will always exceed the effective annual rate for any positive rate of interest.

• Given the same annual percentage rate, borrowers prefer monthly compounding over annual compounding.

• As the number of compounding periods per year increases, the effective annual rate decreases.

• Given the same annual percentage rate, savers prefer annual compounding over monthly compounding.

• When interest is compounded annually, the effective annual rate equals the annual percentage rate .