Use the following information to answer the question below.
A loan of $20,000 is obtained from the bank. The promissory note specifies that $2500 interest is to be paid at the end of the year.
-A credit card states that interest rate is 18%, compounded monthly. What is its effective interest rate?

Question

Quizplus · Accepted Answer

The effective interest rate for an 18% nominal rate, compounded monthly, can be calculated using the formula for effective annual rate (EAR): $EAR = (1 + \frac{r}{n})^n - 1$, where $r$ is the annual nominal rate (0.18 in this case) and $n$ is the number of compounding periods per year (12 for monthly compounding). Plugging in the values, we get $EAR = (1 + \frac{0.18}{12})^{12} - 1$, which simplifies to approximately 19.56%, rounded to 19.6%.

Use the Following Information to Answer the Question Below