You have a $1,000 balance on your credit card. You don\'t plan on using your cre

Question

You have a $1,000 balance on your credit card. You don't plan on using your credit card to buy anything else. You wish to make equal payments starting one month from today to pay off your bill. You've done the calculations and found that if you make a $36 payment per month, your card will be fully paid off 3 years from today. Your credit card company charges you an ANNUAL interest rate that is compounded monthly.

1) What is the ANNUAL RATE OF INTEREST that they charge?

2) What is the EFFECTIVE ANNUAL RATE OF INTEREST that they charge?

ROUND BOTH ANSWERS TO THE NEAREST TENTH OF A PERCENT

Explanation / Answer

We have Present Value PV = 1000 Monthly Payments PMT = 36 Period = 3Yr*12mon/yr = nper = 36 So Monthly Int Rate = Rate(nper,pmt,PV,FV) = Rate(36,-36,1000,0) = 1.47% SO Annual Int Rate = 12*1.47% = 17.70% .....................Ans (1) EIR = (1+i/n)^n - 1 = (1+17.70%/12)^12 - 1 = 19.21% ............Ans (2)

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