Question

Aisva credit card company quotes you a rate of 14.9 percent. Interest is compounded monthly. What is the actual rate (EAR) of interest you are paying? show all work

Answer 1

Solution:-

The effective annual rate (EAR) can be calculated from following formula

Effective annual rate (EAR)= (1+i/n)ⁿ -1

Where

i=Annual interest rate= 14.9%

n=number of compounding periods=12

Substituting the values we get,

Effective annual rate (EAR)=(1+0.149/12)¹² -1

                                                 =1.1596-1=0.1596

                                                 =15.96%

Hence the effective annual rate (EAR) = 15.96%

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