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Nina [5.8K]
3 years ago
8

A credit card company charges 18.6% percent per year interest. Compute the effective annual rate if they compound, (a) annualy,

(b) monthly (c) daily and (d) continuosuly.
Mathematics
1 answer:
Darina [25.2K]3 years ago
3 0

Answer:

a) Effective annual rate: 18.6%

b) Effective annual rate: 20.27%

c) Effective annual rate: 20.43%

d) Effective annual rate: 20.44%

Step-by-step explanation:

The effective annual interest rate, if it is not compounded continuously, is given by the formula

I=C(1+\frac{r}{n})^{nt}-C

where

<em>C = Amount of the credit granted </em>

<em>r = nominal interest per year </em>

<em>n = compounding frequency </em>

<em>t = the length of time the interest is applied. In this case, 1 year. </em>

In the special case the interest rate is compounded continuously, the interest is given by

I=Ce^{rt}-C

(a)  Annually

I=C(1+\frac{0.186}{1})-C=C(1.186)-C=C(1.186-1)=C(0.186)

The effective annual rate is 18.6%

(b) Monthly

<em>There are 12 months in a year </em>

I=C(1+\frac{0.186}{12})^{12}-C=C(1.2027)-C=C(0.2027)

The effective annual rate is 20.27%

(c) Daily

<em>There are 365 days in a year </em>

I=C(1+\frac{0.186}{365})^{365}-C=C(1.2043)-C=C(0.2043)

The effective annual rate is 20.43%

(d)  Continuously

I=Ce^{0.186}-C=C(1.2044)-C=C(0.2044)

The effective annual rate is 20.44%

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