Question

Your Credit Card says that it charges you an interest vote of 20.7% per year but you must make your payments monthly. When you take compounding into consideration what per year interest rate is your credit card really charging you? Write you answer to 4 decimals.

Answer 1

The formula for the amount in compound interest is

Where P is the principal amount

r is the yearly rate of interest

t is the no of years

and n is the number of times the interest is compounted in a year.

Here,

r = 20.7 % = 0.207

n = 12 (12 months in a year)

t = 1

So,

For simple interest the amount for one year is given by

So,

The actual rate of interest r' is