What does the effective interest rate formula eff(I,m) indicate?

The effective interest rate formula eff(I, m) provides a way to calculate the actual interest earned or paid on an investment or loan over a specified period, taking into account the effects of compounding. In this context, "I" represents the nominal interest rate expressed as a percentage, and "m" indicates the number of compounding periods per year.

When the formula states that I is the interest percentage per year compounded m times, it highlights that the nominal rate must be adjusted to account for how frequently interest is applied within a year. Compounding brings forth the phenomenon where interest is calculated on previously accumulated interest, thus increasing the overall amount effectively earned or paid. As a result, the effective interest rate provides a clearer picture of the true cost of a loan or the real yield on an investment.

This option correctly interprets the nature of 'I' and 'm' and how they interact in the calculation, being the cornerstone of understanding effective interest rates in practical applications. The other options misattribute the meanings of 'I,' which makes them less relevant in this context.