Asked by Taylor Lopez on Jun 30, 2024
Verified
Your credit card company quotes you a rate of 18.9%. Interest is billed monthly. What is the actual rate of interest you are paying?
A) 19.48%
B) 19.67%
C) 20.63%
D) 20.87%
E) 21.21%
Actual Rate
The real interest rate or return rate earned on an investment, as opposed to the nominal or advertised rate.
Interest
The cost of borrowing money or the return on investment capital, usually expressed as a yearly percentage.
Credit Card
A small plastic or metal card issued by a bank that allows the holder to purchase goods or services on credit.
- Gain insight into the Effective Annual Rate (EAR), including the approach to its computation.
- Determine and identify the distinctions between nominal and effective interest rates.
Verified Answer
ZK
Zybrea KnightJul 06, 2024
Final Answer :
C
Explanation :
The actual rate of interest, also known as the effective annual rate (EAR), can be calculated when interest is compounded monthly by using the formula: (1+rn)n−1(1 + \frac{r}{n})^n - 1(1+nr)n−1 , where rrr is the annual nominal interest rate (0.189 in this case) and nnn is the number of compounding periods per year (12 for monthly). Plugging in the values gives: (1+0.18912)12−1=0.2063(1 + \frac{0.189}{12})^{12} - 1 = 0.2063(1+120.189)12−1=0.2063 or 20.63%.
Learning Objectives
- Gain insight into the Effective Annual Rate (EAR), including the approach to its computation.
- Determine and identify the distinctions between nominal and effective interest rates.