Anna pays 1.5 percent interest monthly on her credit card account.When the interest rate on that debt is expressed as if it were compounded only annually,the rate would be referred to as the:

Question

Quizplus · Accepted Answer

The annual interest rate that takes into account the effect of compounding over a year is referred to as the effective annual rate (EAR). In this scenario, Anna's nominal interest rate is 1.5% per month, but if this rate is compounded over a year, she would pay an effective annual interest rate that is higher than 1.5%. The EAR calculation takes into account the compounding effect of the interest rate and provides a more accurate measure of the cost of borrowing. The other options, such as the annual percentage rate (APR), compounded rate, quoted rate, or stated rate, do not explicitly account for the compounding effect and may be less informative for consumers.

Anna Pays 1