In dire need of help with APR and APY! Please Help!

Part 1: Explain which companies would advertise APR over APY and describe how this would help them attract customers.

Part 2: Create a unique APR (state how often the rate is compounded) and calculate the corresponding APY. Use a comparison of the two rates to verify your answer to part 1.

Question

A0gneshaleyPe A0gneshaleyPe

04-11-2016
Mathematics

Answered

In dire need of help with APR and APY! Please Help!

Part 1: Explain which companies would advertise APR over APY and describe how this would help them attract customers.

Part 2: Create a unique APR (state how often the rate is compounded) and calculate the corresponding APY. Use a comparison of the two rates to verify your answer to part 1.

Verified Answer :

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syed514 syed514 · Answer 1 · 2016-11-18T14:10:13-05:00

For example, a credit card company might charge 1% interest each month; therefore, the APR would equal 12% (1% x 12 months = 12%). This differs from APY, which takes into account compound interest. The APY for a 1% rate of interest compounded monthly would be 12.68% [(1 + 0.01)^12 – 1= 12.68%] a year. If you only carry a balance on your credit card for one month's period you will be charged the equivalent yearly rate of 12%. However, if you carry that balance for the year, your effective interest rate becomes 12.68% as a result of compounding each month.