A credit card company charges its customers an annual interest of 21.0% on the outstanding monthly balance.The effective annual rate for the customer will be:

Question

Quizplus · Accepted Answer

The effective annual rate takes into account the compounding effect of interest over a year. To calculate the effective annual rate, we use the following formula:

Effective Annual Rate = (1 + (Annual Interest Rate / n))^n - 1

where n is the number of times that interest is compounded in a year.

In this case, the annual interest rate is 21.0%, and interest is compounded monthly, so n = 12.

Plugging these values into the formula, we get:

Effective Annual Rate = (1 + (0.21 / 12))^12 - 1

= 1.2314 - 1

= 0.2314

Multiplying this by 100, we get an effective annual rate of 23.14%.

Therefore, the best choice is C.

A Credit Card Company Charges Its Customers an Annual Interest