Orlando has a loan with an effective interest rate of 7.918%, compounded annually. Which of the following must be true?I. In the effective rate formula, n is equal to one.II. The nominal rate is 7.918%.III. The Federal Funds Rate is static.

For annual compounding, there is one compounding period per year, so n = 1 in the effective-rate formula. With one compounding period, the nominal annual rate equals the effective annual rate, so the nominal rate is 7.918%. Nothing about Orlando’s loan says that the Federal Funds Rate is static, so statement III is not guaranteed. Therefore, the correct choice is A, I and II.

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