As a college student, you probably receive many credit card offers in the mail. Consider these two offers. The first card charges a 17 percent APR. An examination of the footnotes reveals that this card compounds monthly. The second credit card charges 16.25 percent APR and compounds weekly. What is the effective annual rate of the cheaper card?
A) 17.00 percent
B) 17.62 percent
C) 16.25 percent
D) 18.39 percent

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) can be calculated using the formula EAR = (1 + i/n)^(n*12) - 1, where i is the annual interest rate and n is the number of compounding periods per year. For the first card with a 17% APR compounded monthly, EAR = (1 + 0.17/12)^(12) - 1 = 17.62%. For the second card with a 16.25% APR compounded weekly, EAR = (1 + 0.1625/52)^(52) - 1, which is less than 17.62% but not one of the options provided. Therefore, the correct answer is the EAR of the first card, which is 17.62%.

As a College Student, You Probably Receive Many Credit Card