How are equivalent rates defined?

Equivalent rates are defined as interest rates that are adjusted to reflect the effects of different compounding periods. This means that even if two loans have different nominal interest rates, they can be expressed as equivalent rates by adjusting for how frequently interest is compounded over time.

For example, a loan might have a nominal annual interest rate that is compounded monthly, while another loan might have the same nominal rate but compounded quarterly. Though the nominal rates may appear the same, the actual amount of interest paid over time will differ based on the compounding frequency. By converting these rates to an equivalent basis, borrowers can compare different loans more effectively, facilitating more informed decision-making about which loan may be more advantageous.

The other options do not accurately capture the concept of equivalent rates. The definition involving different loans with the same term does not consider the impact of compounding frequency. Fixed rates that do not change describe a certain type of mortgage but do not pertain to the idea of equivalency across different compounding methods. Lastly, stating that equivalent rates are only applicable to commercial loans is overly restrictive and inaccurate, as this principle applies to all types of loans, including personal and residential mortgages.