Dragon bank is offering student credit cards at a special low interest rate of 16% per annum.If monthly minimum payments are required and interest is charged on monthly balances what is the effective annual rate (EAR)?

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) takes into account the compounding effect of monthly interest payments. To calculate the EAR, we can use the formula:

EAR = (1 + r/n)^n - 1

Where r is the annual interest rate (16% in this case) and n is the number of times interest is compounded per year (12 for monthly payments).

EAR = (1 + 0.16/12)^12 - 1
EAR = 0.1723 or 17.23%

Therefore, the effective annual rate (EAR) is 17.23%. The best choice is D.

Dragon Bank Is Offering Student Credit Cards at a Special