Question

You are comparing two credit cards to apply. Vaster Card charges you an APR of 22.4%, compounded daily. Misa card charges you an APR of 22.55%, compounded monthly. Assuming 12 months in a year and 365 days in a year, which card should you get?

Question 3 Part A: Identify the correct formula for identifying the effective interest of Vaster Card.

Answer 1

Effective interst rate calculation

=( 1+r/t)^t-1

Here

r =Nominal interst per annum (APR)

t=number of compunding

Effective interest rate of VASTER CARD

=( 1+r/t)^t-1

Here

r =22.4%

t=365 times (daliy compounding)

therefore

= ( (1+0.224/365)³⁶⁵-1) x100

= 0.250985 x100

= 25.0985%

Effective interest rate of MISRA CARD

=( 1+r/t)^t-1

Here

r =22.55%

t=365 times (daliy compounding)

therefore

= ( (1+0.2255/12)¹²-1) x100

= 0.25033 x100

= 25.033%

MISA CARD is better because effective interst rate is lower than VASTER CARD by 0.0655 %(25.0985-25.033)