Question

After reading the fine print in your credit card agreement, you find that the "low" interest rate is actually an 18% apr, or 1.5% per month. what is the effective annual rate?

a. 18.47%
b. 19.41%
c. 19.56%
d. 18.82%

Answer 1

The effective annual rate is approximately b. 19.41% for the given credit card agreement.

Step-by-step explanation:

To calculate the effective annual rate, we'll use the formula:

(1 + r/n)^n - 1

Where r is the nominal interest rate and n is the number of compounding periods per year.

In this case, the nominal interest rate is 1.5% per month, which is equivalent to 18% per year (since there are 12 months in a year).

Plugging in the values into the formula:

(1 + 0.18/12)^12 - 1 = 0.1941 ≈ 19.41%

So, the effective annual rate is approximately 19.41%.