Question

A credit card company offers you a credit card with Annual percentage rate (APR) of 20%....

A credit card company offers you a credit card with Annual percentage rate (APR) of 20%. Interests are compounded quarterly. What is the Effective Annual Rate (EAR)?

A) 20%

B) 121%

C) 21%

D) 21.55%

E) 121.55%

Homework Answers

Answer #1

Given APR = 20%;

Nature = Quarterly Compounding;

Effective Annual rate = (1+20%/4)^4-1 = 21.55%

Eg:
Amount 100
Rate 20%
Qtr 1 Interest             5.00
Qtr 2 Interest             5.25
Qtr 3 Interest             5.51
Qtr 4 Interest             5.79
Total           21.55
Effective % 21.55%
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