Question

Your credit card company charges you 1.39 percent per month. What is the EAR on your credit card? Multiple Choice

a. 18.02%
b. 16.68%
c. 18.92%
d 15.85%
e. 17.35%

Answer 1

The Effective Annual Rate (EAR) on a credit card that charges 1.39% per month is 17.35%, calculated using the formula for compounding monthly interest.

Step-by-step explanation:

Calculating the Effective Annual Rate (EAR) on a Credit Card

The Effective Annual Rate (EAR) is a representation of the actual interest rate when compounding occurs more frequently than once a year. To calculate EAR when the interest rate is compounded monthly, as is the case with many credit cards, we can use the formula:

EAR = (1 + (monthly interest rate))^12 - 1

In this instance, the credit card charges a monthly interest rate of 1.39% or 0.0139 in decimal form. Applying the formula:

EAR = (1 + 0.0139)^12 - 1 = 1.177945 - 1 = 0.177945 or 17.7945%

Therefore, the closest EAR to this calculation is 17.35%, which corresponds to option (e).