Question

If Marcos wants to restrict the effective interest rate that he pays on his credit card to 12% per year, what APR rate should he look for if the credit card company is compounding?

a. 12 times a year?

b. 52 times a year?

c. 365 times a year?

Answer 1

a) 12 times a year:

EAR = (1 + APR/n)ⁿ - 1

0.12 = (1 + APR/12)¹² - 1

1.12 = (1 + APR/12)¹²

1.009489 = 1 + APR/12

0.009489 = APR/12

APR = 0.1139 or 11.39%

a) 52 times a year:

EAR = (1 + APR/n)ⁿ - 1

0.12 = (1 + APR/52)⁵² - 1

1.12 = (1 + APR/52)⁵²

1.002182 = 1 + APR/52

0.002182 = APR/52

APR = 0.1135 or 11.35%

a) 365 times a year:

EAR = (1 + APR/n)ⁿ - 1

0.12 = (1 + APR/365)³⁶⁵ - 1

1.12 = (1 + APR/365)³⁶⁵

1.000311 = 1 + APR/365

0.000311 = APR/52

APR = 0.1133 or 11.33%