The simple or linear annualized short-term interest rate is calculated according to:
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A. B. C. D. E.C
The rate to be paid over the period is equal to the annual rate multiplied by the length of the period, as a proportion of a year.
The correct answer is C.
The simple or linear annualized short-term interest rate is calculated by multiplying the annual rate by the length of the period, as a proportion of a year. This calculation is based on the assumption that the interest is compounded once per year.
Let's break down the answer options to understand why C is the correct choice:
A. This option suggests multiplying the annual rate by the length of the period in months. However, this calculation would not account for the fact that a year consists of more than 12 months. It would underestimate the annual interest rate.
B. This option suggests dividing the annual rate by the length of the period in months. Again, this calculation would underestimate the annual interest rate because it fails to consider that a year consists of more than 12 months.
C. This is the correct answer. It proposes multiplying the annual rate by the length of the period, as a proportion of a year. For example, if the annual interest rate is 10% and the period is three months, the calculation would be: 0.10 (annual rate) x (3/12) = 0.025, or 2.5%. This calculation correctly accounts for the length of the period as a fraction of a year.
D. This option suggests multiplying the annual rate by the length of the period as a percentage of six months. This calculation would only be appropriate if the length of the period is exactly six months. It does not provide a general formula for any period length.
E. This option suggests dividing the annual rate by the length of the period as a proportion of the year. This calculation would underestimate the annual interest rate because it fails to consider that a year consists of more than 12 months.
In summary, the correct calculation for the simple or linear annualized short-term interest rate is to multiply the annual rate by the length of the period, as a proportion of a year (Option C).