Question

Roscoe's credit card has an apr of 13.59%, and it just changed its compounding period from daily to monthly. what will happen to the effective interest rate charged to roscoe? a. it will increase by about 0.08%. b. it will decrease by about 0.8%. c. it will increase by about 0.8%. d. it will decrease by about 0.08%.

Answer 1

The effective interest rate charged to Roscoe will decrease by about 0.08% when the compounding period on his credit card changes from daily to monthly because interest will be compounded less frequently over the year.

Step-by-step explanation:

If Roscoe's credit card has an APR of 13.59% and the compounding period changes from daily to monthly, the effective interest rate will decrease. The effective interest rate is higher when the compounding period is more frequent because interest is being added to the balance more often, which in turn generates more interest.

Changing the compounding from daily to monthly means that interest will be compounded less frequently over the year. As a result, the amount of interest that gets compounded will be slightly lower. With less frequent compounding, Roscoe will incur less interest, making option (b) the correct answer: the effective interest rate will decrease by about 0.08%.