Question

A bank states that it charges a 20% APR (or annual percentage rate) on credit card balances where the cardholder has been late making a payment. However, the bank compounds monthly. What EFF% is the bank charging?

Group of answer choices

22.45%

21.94%

21.62%

23.85%

22.77%

Answer 1

The effective rate is          21.94%

the APR charged by bank is 20% p.a..- compounded monthly

so the monthly compounding rate is 1.666667%   ( 20/12)    or   0.0166667

Lets find out the value of 1$ compounded monthly at 0.0166667

                PV = 1,      n = 12 months,    and r = 0.0166667

    FV    =      PV( 1+r)ⁿ

                 =     1 X ( 1+ 0.0166667)¹²

                 =1.219391085

So 1 Dolloar becomes 1.21939 dollars after 12 months, instead of becoming 1.20 dollars

so effective rate    =    (1.21939 - 1)/ 1     X 100

                          =   0.21939 X 100

                         = 21.94%