Suppose your credit card issuer states that it charges a 19.50% nominal annual rate,but you must make monthly payments,which amounts to monthly compounding.What is the effective annual rate?

Question

Quizplus · Accepted Answer

To find the effective annual rate, we need to use the formula:

(1 + r/n)^n - 1

where r is the nominal annual rate and n is the number of times the interest is compounded per year.

In this case, r = 19.50% and n = 12 (since there are 12 months in a year).

Plugging in the numbers, we get:

(1 + 0.1950/12)^12 - 1 = 0.2134 or 21.34%

Therefore, the effective annual rate is 21.34%.

Suppose Your Credit Card Issuer States That It Charges a 19.50