Your credit card statement indicates a finance charge of 20.00 % per month on the outstanding balance. What is the effective rate of interest (APY) to the nearest hundredth?
A) 20.00 %
B) 21.94 %
C) 21.67 %
D) 240.00 %
E) 1.67 %

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) or annual percentage yield (APY) can be calculated using the formula for compound interest: $EAR = (1 + \frac{i}{n})^{n} - 1$, where $i$ is the nominal interest rate (in this case, 20% or 0.20 per month), and $n$ is the number of compounding periods per year (in this case, 12 months). Plugging the values into the formula gives $EAR = (1 + \frac{0.20}{12})^{12} - 1$, which approximately equals 0.2194 or 21.94% when converted to a percentage.

Your Credit Card Statement Indicates a Finance Charge of 20