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Q: financial Management ( Answered 4 out of 5 stars,   0 Comments )
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.)
Subject: Re: financial Management
Answered By: omnivorous-ga on 08 Apr 2005 16:27 PDT
Rated:4 out of 5 stars
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

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:

Best regards.

hammoudi-ga rated this answer:4 out of 5 stars

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