Question #3: Interest rates are quoted either as Annual Percentage Rate (APR) or Effective Annual Rate...

Question #3: Interest rates are quoted either as Annual Percentage Rate (APR) or Effective Annual Rate (EAR)

Required: What is the difference between an Annual Percentage Rate and an Effective Annual Rate?

Expert Solution

Banks and financial institutions are required to disclose their interest rate for borrowing, to the customers.

Annual Percentage Rate (APR) is the interest rate charged per period for a loan multiplied by the number of payment periods in a year. For example, if the interest rate for a car loan is 1% per month, its APR will be 12%. The method of calculating APR is fixed by law.

Interest rate

No of periods

Effective Annual Rate (EAR) is also called Annual Effective Yield. It is the measure of opportunity cost of the interest by considering the effect of periodic compounding.

Interest rate

No of periods in a year

While APR considers simple interest rate, EAR considers the compounding effect. So EAR will be always higher than APR

jeff jeffy answered 2 years ago

Explain the difference between the Annual Percentage Rate (APR) and the Effective Annual Percentage Rate (EAR).

Explain the difference between the Annual Percentage Rate (APR) and the Effective Annual Percentage Rate (EAR).What would cause the EAR to be greater than the APR?When would the APR and EAR be the same?Can the APR ever be greater than the EAR?

What is the difference between the annual percentage rate (APR) and the effective annual rate (EAR)?...

What is the difference between the annual percentage rate (APR) and the effective annual rate (EAR)? Which rate do you believe is more relevant for financial decisions and why?

Which is the best definition of an annual percentage rate (APR)? A. The interest rate expressed...

Which is the best definition of an annual percentage rate (APR)? A. The interest rate expressed in terms of the interest payment made each period. Also, quoted interest rate B. The interest rate charged per period multiplied by the number of periods per year. C. An annuity for which the cash flows occur at the beginning of the period. D. A level stream of cash flows for a fixed period of time. E. The interest rate expressed as if it...

a. What is the effective annual interest rate (EAR) of the APR of 10.5% given that...

a. What is the effective annual interest rate (EAR) of the APR of 10.5% given that it is compounded quarterly? Monthly? Annually? Daily? b. If you purchase a new home for $250,000 today, what is your monthly payment if you have to pay 4.25% annual interest compounded monthly? Assume a 30‐year fixed mortgage (360 months) and 25% down on the home (this is of the purchase price above).

Bank USA offers a semiannual interest rate of 0.7%, what is the APR (annual percentage rate)?...

Bank USA offers a semiannual interest rate of 0.7%, what is the APR (annual percentage rate)? A. 0.700% B. 1.400% C. 1.1405% D. 2.800% E. 7%

When interest is compounded more than once a year, the effective annual rate (APR) is lower...

When interest is compounded more than once a year, the effective annual rate (APR) is lower than the quoted rate. true , false

effective annual interest rate

You have received a loan from a bank with a quoted rate of 18 percent compounded monthly. What is the Effective annual interest rate of the loan?

32. Mortgage rates: Following are interest rates (annual percentage rates) for a 30-year fixed rate mortgage...

32. Mortgage rates: Following are interest rates (annual percentage rates) for a 30-year fixed rate mortgage from a sample of lenders in Macon, Georgia on a recent day. It is reasonable to assume that the population is approximately normal. 4.750 4.375 4.176 4.679 4.426 4.227 4.125 4.250 3.950 4.191 4.299 4.415 a. Construct a 99% confidence interval for the mean rate. b. One week earlier, the mean rate was 4.050%. A mortgage broker claims that the mean rate is now...

Problem 4-15 (Effective Rate of Interest) Effective Rate of Interest Find the interest rate (or rates...

Problem 4-15 (Effective Rate of Interest) Effective Rate of Interest Find the interest rate (or rates of return) in each of the following situations. Do not round intermediate calculations. Round your answers to the nearest whole number. You borrow $650 and promise to pay back $676 at the end of 1 year. __________% You lend $650 and receive a promise to be paid $676 at the end of 1 year. __________% You borrow $80,000 and promise to pay back $101,342...

If you invest $1,000 into a savings account at an annual interest rate of 3% (APR),...

If you invest $1,000 into a savings account at an annual interest rate of 3% (APR), compounded semi-annually, how much will you have in the savings account after 14 years?

Question