The effective annual rate always exceeds or is always equal

The effective annual rate always exceeds or is always equal to the nominal rate. True or False?

Solution

Answer is True

Effective rate is always exceeds or equal to the nomial rate

For example if interest is compounded annualy and interest rate is 12% per annum in this case nominal rate is 12%

But if interest compounded semiannual then effective rate

effective rate = (1+r/n)^n -1 = (1+12%/2)^2 -1 =1.1236 = 12.36%

and if interest is compounded annualy in this case effective rate would be 12%