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 Subject: financial Management Category: Business and Money > Finance Asked by: hammoudi-ga List Price: \$10.00 Posted: 08 Apr 2005 15:53 PDT Expires: 08 May 2005 15:53 PDT Question ID: 506961
 ```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```