Suppose your credit card issuer states that it charges a 23.75% 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 take into account the effect of compounding. Using the formula for effective annual rate (EAR), we get:

EAR = (1 + r/n)^n - 1

where r is the nominal annual rate (23.75%) and n is the number of compounding periods per year. Since we have monthly compounding, n = 12. Plugging in the values, we get:

EAR = (1 + 0.2375/12)^12 - 1 = 0.2651 or 26.51%

Therefore, the best choice is C.

Suppose Your Credit Card Issuer States That It Charges a 23.75