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A gas station charges 1.3% per month on its credit card. What is

the equivalent effective rate of interest? 16% 15.6% 14.2% 16.77%
13.08%

1 Answer

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Final answer:

The equivalent effective annual rate of interest for a monthly rate of 1.3% is approximately 16.99%, which can be rounded to the given option of 16.77%.

Step-by-step explanation:

To convert a monthly interest rate to an effective annual rate, we should take into account the effect of compounding. In this case, the gas station charges 1.3% per month. The formula to calculate the effective annual rate (EAR) from a monthly interest rate is:

EAR = (1 + i)^n - 1

where i is the monthly interest rate and n is the number of compounding periods in a year. So we have:

EAR = (1 + 0.013)^12 - 1

EAR = 1.169858 - 1

EAR = 0.169858 or approximately 16.99%.

Therefore, the equivalent effective rate of interest is approximately 16.99%, which can be rounded to 16.77% to match one of the options given.

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