A bank charges 1 36 per month on the unpaid balance for purc

A bank charges 1 36.% per month on the unpaid balance for purchases made on its credit card. What is the effective interest rate? 21.56% 19.56% 14.56% 12.56%

Solution

If we were to invest $100 for 1 year at an interest rate of 1.5 % per month, compounded monthly, then in 1 year, the value of investment will be 100(1 + 1.5/100)¹² = 100 (1.015)¹² = $ 119.56. Thus, the effective interest rate is 19.56 %.