(Q. 8 IN B) A CREDIT CARD COMPANY SENDS YOU A PROMOTION THAT SAYS I...
3. (Q. 8 in B) A credit card company sends you a promotion that says it will
charge you an interest rate of 1.25% monthly. In this case the annual
percentage rate (APR) is ____ and the effective annual rate (EAR) is _______
and if I carried a $300 balance throughout the year I would owe _______ at the
end of the year.
A) 16.08%; 15.00%; $348.24
B) 15.00%; 14.55%; $345.00
C) 14.55%; 15.00%; $345.00
D) 15.00%; 16.08%; $348.24
Answer D
APR = 1.25% × 12 = 15%
EAR = (1+1.25%)^12 – 1 = 16.08%
Balance owing = 300 × (1+0.1608) = $348.24.