Answer:
C. It is the interest rate that would earn the same interest with annual compounding
Explanation:
[tex](1+r_e)^{n} = (1+r/m)^{n\times m}[/tex]
Is the rate which offers the same yields of a rate with compounding.
For example:
if a rate of 10% coumpound semiannually the effective rate will be
[tex](1+r_e)^{1} = (1+0.10/2)^{1\times 2}[/tex]
[tex]r_e= (1.05)^{2}-1[/tex]
[tex]r_e= 1.1025-1 = 10.25[/tex]
An annual rate of 10.25 will be equivalent of a 10% rate compounding semianually.
