Question

Credit card issuers are required to disclose the Annual Percentage Rate (APR) on their monthly statements. If the APR is stated to be 23.50%, with interest compounded monthly, the Effective Annual Interest Rate (EAR) is less than 23.50%.

A) True
B) False

Answer 1

The statement given in the question is False. The Effective Annual Interest Rate (EAR) is actually greater than the stated Annual Percentage Rate (APR) if interest is compounded monthly.

Step-by-step explanation:

The statement given in the question is False. The Effective Annual Interest Rate (EAR) is actually greater than the stated Annual Percentage Rate (APR) if interest is compounded monthly.

To calculate the Effective Annual Interest Rate (EAR), we use the formula: EAR = (1 + (APR/n))^n - 1

In this case, the APR is 23.50% and the interest is compounded monthly, so n = 12 (number of compounding periods in a year).

Plugging in these values into the formula, we get: EAR = (1 + (0.2350/12))^12 - 1 = 0.2493 or 24.93%

Therefore, the Effective Annual Interest Rate (EAR) is greater than the stated 23.50% APR.