Final answer:
The effective annual rate (EAR) for a store credit account that charges 1.5% monthly interest, compounded monthly, is approximately 19.56%.
Step-by-step explanation:
If a store credit account charges a 1.5% interest each month, to find the effective annual rate (EAR) we need to calculate the compounded interest for a year. The formula for the EAR when interest is compounded monthly is given by (1 + i)^n - 1, where i is the monthly interest rate and n is the number of compounding periods in a year.
In our case, the monthly interest rate i is 1.5% or 0.015 when expressed as a decimal, and we have n=12 compounding periods (one for each month of the year). Plugging these values into the formula gives us:
EAR = (1 + 0.015)^12 - 1
EAR = (1.015)^12 - 1
EAR ≈ 1.1956 -1
EAR ≈ 0.1956 or 19.56%
The effective annual rate for a 1.5% monthly interest rate compounded monthly is approximately 19.56%.
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