Loans: What happens to the effective interest rate

What happens to the effective interest rate as compounding periods get shorter, e.g., move from monthly to daily?

Question options:

  • There is no change since the compounding period does not change the desired effective period.
  • There is a decrease since the denominator in the 'interest for compounding period' term gets larger.
  • The effective interest rate increases.
  • There is a decrease since there is an increase in the frequency of payments.
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