Question

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%

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%