Asked by Khalil Vonner on Jul 21, 2024
Verified
A credit card company charges you an interest rate of 1.25% monthly. The annual percentage rate is ____ and the effective annual rate is _______.
A) 15.00%; 15.00%
B) 15.00%; 14.55%
C) 14.55%; 15.00%
D) 15.00%; 16.08%
E) 16.08%; 15.00%
Annual Percentage Rate
The annual rate charged for borrowing or earned through an investment, which includes all fees and costs.
Effective Annual Rate
The interest rate that describes the full amount of interest paid over one year, considering compounding.
- Acquire knowledge on the calculation and comparison techniques for nominal, effective, and APR interest rates.
- Evaluate the influence of diverse compounding periods on the yields from investments and the costs incurred from loans.
Verified Answer
CB
Chase BremnerJul 23, 2024
Final Answer :
D
Explanation :
The annual percentage rate (APR) is simply the monthly rate multiplied by 12, which gives 1.25% * 12 = 15.00%. The effective annual rate (EAR) takes into account the effect of compounding and is calculated as (1 + 0.0125)^12 - 1 = 0.16075 or 16.08%.
Learning Objectives
- Acquire knowledge on the calculation and comparison techniques for nominal, effective, and APR interest rates.
- Evaluate the influence of diverse compounding periods on the yields from investments and the costs incurred from loans.