You recently received a letter from Cut-to-the-Chase National Bank that offers you a new credit card that has no annual fee. It states that the annual percentage rate (APR) is 16 percent on outstanding balances. What is the effective annual interest rate?

Effect Annual rate of return = 17.22%

Explanation:

The Effective annual rate of return is the equivalent rate earned where compounding is done frequently at period or interval less than a year.

EAR = (1+r/m) ^n * m - 1

EAR - Equivalent annual rate of return, r - annul rate of return, n-number of years

r = 16/12 = 1.333%, n = 1 m = 12 (note there are 12 months in a year)

EAR = (1+0.16/12) ^ (1*12) - 1

EAR = 1.0133^12 - 1 = 0.1722

EAR 0.1722 * 100 = 17.22%

Effect Annual rate of return = 17.22%