Why this is mistaken
A stated quote and an effective annual rate answer different questions. Under monthly compounding, twelve applications of the monthly rate make effective growth exceed the positive stated quote. Convert both alternatives to an aligned effective basis, then separately inspect fees, timing, and other terms.
Where to watch
When this mistake may appear
- Two quotes use the same annual percentage but different compounding frequencies.
- A question asks for actual one-year growth.
Check your work
Your work may contain this mistake if:
- Reports 6% EAR for a 6% stated quote compounded monthly.
- Compares stated rates across frequencies without converting them.