Question: Like cash flows, the interest rate can also be compounded over time. When compounding the interest rate, we are simply accounting for the interest being

Like cash flows, the interest rate can also be compounded over time. When compounding the interest rate, we are simply accounting for the interest being earned on interest over a time period.

One example of the computation of an annual compounded or effective interest rate is associated with your credit card.

You recently received a letter from a local bank that offers you a new credit card that has no annual fee. It states that the annual percentage rate (APR) is 14 percent on outstanding balances. Note that the annual percentage rate does not account for compounding, rather the APR is simply the periodic rate times the number of periods. What is the effective annual interest rate? (This rate is subject to monthly compounding.)

Record your answer as a decimal.

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