Asked by YUEYING HUANG on May 01, 2024
Verified
What is the effective annual interest rate on a credit card with an interest rate of 15% per year, compounded monthly?
A) 15.0%
B) 16.1%
C) 17.8%
D) 18.3%
Compounded Monthly
The process of calculating interest on both the initial principal and the accumulated interest from previous periods, with the compounding occurring on a monthly basis.
Effective Annual Interest Rate
The actual interest rate on an investment or loan when compounding occurs more frequently than annually, reflecting the true financial cost or yield over a year.
- Transition monthly interest rates into effective annual rates (EAR) of return.
Verified Answer
SQ
Salma QureshiMay 08, 2024
Final Answer :
B
Explanation :
The effective annual interest rate (EAR) can be calculated using the formula EAR = (1 + i/n)^(n*1) - 1, where i is the annual interest rate and n is the number of compounding periods per year. For a 15% interest rate compounded monthly, i = 0.15 and n = 12. Plugging these values into the formula gives EAR = (1 + 0.15/12)^(12*1) - 1 ≈ 0.16075 or 16.1%.
Learning Objectives
- Transition monthly interest rates into effective annual rates (EAR) of return.