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?

Expert Solution

When the frequency compounding of interest rate is more than one for a year then the effective annual percentage rate (EAR) is used instead of annual percentage rate (APR). APR is quoted interest rate while EAR is effective interest rate which is actually paid.

Effective annual rate (EAR) = (1 + APR/m) ^m – 1

Where,

Effective annual percentage rate =EAR

Annual percentage rate = APR

Number of compounding period per year = m

What would cause the EAR to be greater than the APR?

The frequency of compounding of interest rate cause the EAR to be greater than the APR

When would the APR and EAR be the same?

When the frequency of compounding of interest rate is one (m=1; in above formula) then the APR and EAR be the same

Can the APR ever be greater than the EAR?

No, the APR cannot be greater than the EAR. APR could be either less or equal to EAR.

jeff jeffy answered 2 years ago

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?

What is the difference between EAR (effective annual rate) andAPR (annualized percentage rate)? Which one...

What is the difference between EAR (effective annual rate) and APR (annualized percentage rate)? Which one does a better job of measuring return? Give an example that illustrates your reasoning.

What is the difference between the effective annual rate and the annual percentage rate, and when...

What is the difference between the effective annual rate and the annual percentage rate, and when should you use which?

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).

(a) Calculate the effective annual rate (EAR) for each, given the nominal rate of 12% (APR)...

(a) Calculate the effective annual rate (EAR) for each, given the nominal rate of 12% (APR) and the following compounding frequencies: (I) quarterly (II) monthly (III) daily. (b) Calculate the nominal rate (APR) for each, given the effective annual rate of 12% (EAR) and the following compounding frequencies: (I) quarterly (II) monthly (III) daily. (c) Calculate the periodic rate in percent for each, given the nominal rate of 12% (APR) and the following compounding frequencies: (I) quarterly (II) monthly (III)...

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?

Explain the difference between a comparison interest rate and the average annual percentage rate. (Explain accounting...

Explain the difference between a comparison interest rate and the average annual percentage rate. (Explain accounting and mathematical formulas to calculate: interest rates; mortgage repayments; term of a loan).

NEED TO CALCULATE EAR Stated rate (APR) # of times per year Effective rate 9.80% Quarterly...

NEED TO CALCULATE EAR Stated rate (APR) # of times per year Effective rate 9.80% Quarterly 12.40% Monthly 7.60% Daily 8.40% Infinite

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...

What is the EAR (effective annual rate) of 9.60 percent compounded quarterly?

What is the EAR (effective annual rate) of 9.60 percent compounded quarterly?Group of answer choices9.68 percent9.92 percent9.83 percent9.71 percent9.95 percent

Question