Question

A department store has offered you a credit card that charges interest at 1.65% per month compounded monthly. (a) (a) What is the nominal interest (annual percentage) rate for this credit card? (b) (b) What is the effective annual interest rate?

Answer 1

a) r = 1.65% *12 = 19.8%

b)
`r = (1+i)^(12) -1`

And i= 0.0165 and replacing we got:

`r = (1+0.0165)^(12) - 1 =0.21699`

And if we convert this into % we got: 21.699%

Step-by-step explanation:

Nominal interest rate represent the interest rate before taking account the inflation

The effective annual interest rate represent the real return from an investment

Part a

For this case the nominal interest is given by:

r = 1.65% *12 = 19.8%

Part b

We can use this formula:

`r = (1+i)^(12) -1`

And i= 0.0165 and replacing we got:

`r = (1+0.0165)^(12) - 1 =0.21699`

And if we convert this into % we got: 21.699%