Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding.What is the effective annual rate?
A) 15.27%
B) 16.08%
C) 16.88%
D) 17.72%
E) 18.61%

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) can be calculated using the formula: EAR = (1 + i/n)ⁿ - 1, where i is the nominal annual interest rate and n is the number of compounding periods per year. Here, i = 15.00% or 0.15, and n = 12 (monthly compounding). Plugging these values into the formula gives EAR = (1 + 0.15/12)¹² - 1 ≈ 0.16075 or 16.08%.

Suppose Your Credit Card Issuer States That It Charges a 15.00