If your credit card calculates interest based on 18% APR, compounded monthly Wha
ID: 1194684 • Letter: I
Question
If your credit card calculates interest based on 18% APR, compounded monthly What ore your monthly interest rate and annual effective interest rate? If you're currently outstanding balances $3000 and you skip payment for two months, what would be the total balance two months from now? A local bank advertises the following information: interest 6.89% - effective annual yield 7.128%. No mention was made of the interest period in the advertisement. Can you figure out the compounding scheme used by the bank? A financial institution is willing to lend you $300 However, $315 is repaid or the end of one week: What is the nominal interest rate? What is the effective annual interest rate?Explanation / Answer
a) The term annual percentage rate of charge (APR), corresponding sometimes to anominal APR and sometimes to an effective APR (or EAPR), describes the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on aloan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate.Those terms have formal, legal definitions in some countries or legaljurisdictions, but in general:
Monthly rate of intetest is 18/12 = 1.5%
1000 (1+0.015)12
1000 (1.19561817)
1195.61817
Effective annual rate of interest = 19.56%
b) 3000(1.015)2
3000(1.03022)
3090.66
d. 15/300*100= 5%
e. Consider a stated annual rate of 10%. Compounded yearly, this rate will turn $1000 into $1100. However, if compounding occurs monthly, $1000 would grow to $1104.70 by the end of the year, rendering an effective annual interest rate of 10.47%.