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Your credit card company charges you 1.45 percent per month. What is the EAR on your credit card? Multiple Choice A 16.53% B 18.13% C 18.86% D 17.40% E 19.80%

Your credit card company charges you 1.45 percent per month. What is the EAR on your credit card? Multiple Choice A 16.53% B 18.13% C 18.86% D 17.40% E 19.80%

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question

Your credit card company charges you 1.45 percent per month. What is the EAR on your credit card?

Multiple Choice
A 16.53%
B 18.13%

C 18.86%
D 17.40%
E 19.80%

Expert Solution
Step 1

Answer to above question is OPTION (C) i.e. 18.86%

Formula to calculate Effective Annual Interest rate:

   EAR=(1+i/m)^m-1

   where i=interest rate

             m=frequency of compounding

       

                In the given question Interest rate =1.45% per month

                                 Interest rate per annum = 1.45%*12=17.4% per annum

                               Monthly compounding =12 times

                     

                EAR=(1+i/m)^m-1

                        =(1+17.4%/12)^12-1

                        =1.1886-1

                        =0.1886 OR 18.86%

                        

 

 

 

 

 

 

             

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