You recently received a letter from Cut-to-the-Chase National Bank
that offers you a new credit card that has no annual fee. It states
that the annual percentage rate (APR) is 18 percent on outstanding
balances. What is the effective annual interest rate? (Hint: Remember
these companies bill you monthly.)

Hammoudi --

This is a classic case of effective annual yield, given a yield over a
shorter period.  The money compounds -- so it will be higher than 1.5%
per month or the 18% advertised.

The easiest way to demonstrate the compounding is to assume that a
principal amount -- we'll use $100 -- compounds unpaid over the
period:

JAN $100 principal, $1.50 interest
FEB $101.50, $1.52
MAR $103.02, $1.55
APR $104.57, $1.57
MAY $106.14, $1.59
JUN $107.73, $1.62
JUL $109.34, $1.64
AUG $110.98, $1.66
SEP $112.65, $1.69
OCT $114.34, $1.72
NOV $116.06, $1.74
DEC $117.79, $1.77

TOTAL INTEREST: $19.56 ON $100 principal

Effective annual yield: 19.56%

You may be interested to see a slightly more complex but similar
calculation that I did recently:
http://answers.google.com/answers/threadview?id=505824

Best regards.

Omnivorous-GA