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27 August, 19:28

You are paying an effective annual rate of 18.974 percent on your credit card. The interest is compounded monthly. What is the annual percentage rate on this account?

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  1. 27 August, 22:18
    0
    17.5%

    Explanation:

    Effective annual rate is a yearly rate of return which includes the compounding effect. APR is the simple rate of return which is being paid on the principal amount that is being invested.

    Formula for Effective Interest rate

    EAR = (1 + APR/n) ^n - 1

    0.18974 = (1 + APR/12) ^12 - 1

    0.18974 + 1 = (1 + APR/12) ^12

    1.18974 = (1 + APR/12) ^12

    (1.18974) 1/12 = ((1 + APR/12) ^12) 1/12

    1.0146 = 1 + APR/12

    1.0146 - 1 = APR / 12

    0.0146 = APR / 12

    APR = 0.0146 x 12

    APR = 0.175 = 17.5%
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