Question

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?

Answer 1

Answer:

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%