As a college student, you probably receive many credit card offers in the mail. Consider these two offers. The first card charges a 17 percent APR. An examination of the footnotes reveals that this card compounds daily (365 day year). The second credit card charges 18 percent APR and compounds semiannually. What is the effective annual rate of the cheaper card?
A) 18.00 percent
B) 17.00 percent
C) 18.81 percent
D) 18.53 percent

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) for the first card is calculated using the formula: EAR = (1 + APR/n)^n - 1, where n is the number of compounding periods per year. For daily compounding, n = 365. Thus, EAR = (1 + 0.17/365)^365 - 1 ≈ 18.53%.

As a College Student, You Probably Receive Many Credit Card