first bank is ending alumni of universities an invitation to obtain a credit car
ID: 2692770 • Letter: F
Question
first bank is ending alumni of universities an invitation to obtain a credit card, with the name of their university written on it, for nominal 9.9% interest per year after 6 months of 0% interst. These interest rates apply to outstanding debt if not paid by specified date each months, and hence interest is compounded monthly. If you fail to make the minmum payment in any month, your interest rate could increase (without notice) to a nominal 19.19% per year. Calculate the effictive annual interest rates the credit card company is charging in both cases. please show the work and explain !!Explanation / Answer
Case 1: 0% interest for 6 months, 9.9% interest for the remaining 6 months
Let the compounded period m = 12 months. nominal annual interest rate r = 0.099, compounded monthly (for last 6 months so is only applied to 6 iterations of (1+(r/m)))
effective annual interest rate ie = (1 + (r/m))^m - 1
ie = (1 + (0.099/12))^6
ie = 0.0505 or 5.05%
Case 2: nominal annual interest rate r = 0.1999, compounded monthly
ie = (1 + (0.1999/12))^12
ie = 0.2192 or 21.92%
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