Question

Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding. What is the effective annual rate? Select one:

a. 15.27%
b. 16.08%
c. 16.88%
d. 17.72%
e. 18.61%

Answer 1

option (b) 16.08%

Step-by-step explanation:

Data provided in the question:

Nominal annual rate charged, APR = 15.00% = 0.15

Now,

The relation between the effective annual rate and the Annual rate (APR) is given as:

Effective annual rate =
`(1 + (APR)/(n))^(n)-1`

here,

n is the number of periods

for monthly compounding, n = 12

Therefore,

Effective annual rate =
`(1 + (0.15)/(12))^(12)-1`

or

= ( 1 + 0.0125 )¹² - 1

= 1.1608 - 1

= 0.1608

or

= 0.1608 × 100%

or

= 16.08%

Hence,

The answer is option (b) 16.08%