If your credit card says 28% interest compounded daily,what is the effective interest rate?
A)32.3%
B)29.8%
C)31.9%
D)28.9%

Question

Quizplus · Accepted Answer

The effective interest rate can be calculated using the formula for compound interest: $A = P(1 + \frac{r}{n})^{nt}$, where $A$ is the amount after time $t$, $P$ is the principal amount, $r$ is the annual nominal interest rate (as a decimal), $n$ is the number of compounding periods per year, and $t$ is the time the money is invested for in years. For daily compounding, $n = 365$. The effective interest rate (EIR) is found by calculating the amount at the end of one year ($t = 1$) on a principal of 1 and subtracting 1 from the result. Given a 28% nominal rate, or $r = 0.28$, and daily compounding, the EIR is higher than the nominal rate due to the effects of compounding. The correct calculation leads to an EIR of approximately 32.3%.

If Your Credit Card Says 28% Interest Compounded Daily,what Is