Question

Can anyone explain what is the difference between EARs and APRs? please give me an example.

I am little confused about the quoted rate. Can anyone explain it?

What is a pure discount loan please give me an example?

What does it mean to amortize a loan?

Answer 1

APR (Annual percentage rate) is a simple interest concept and it refers to the rate obtained by multiplying the periodic interest rate by the number of payment periods a year. For instance if the monthly interest is 1%, the APR is 1% and 12 = 12%.

EAR (Equivalent annual rate) is a compound interest concept and at the end of every period the interest is added to the principal at the beginning, which then becomes the beginning principal for the next period and so on; ie: the interest is compounded every component period within a year.

For example:

If 1% is the monthly interest.

APR = 1*12 = 12%, and

EAR = 1.01^12-1 = 12.68%

Quoted rate is the rate p.a. quoted by the lender and is usually the APR. It is usually for a year and the periodic interest is obtained by the formula - Periodic rate = Quoted rate/Number periods in a year.

Pure Discount Loan is one where the lender lends a sum of money to the borrower today and the borrower repays a single lump sum at the end of the term of the loan. No payment in the form of interest is made in between. Eg: A treasury bill with promises to pay a sum of money at a future date for its price to be paid today.

Amortizing a loan means the payment of interest and principal of a loan over its term, usually in equated instalments, in such a manner that when the equal payments are made for the term of the loan, the loan gets fully extinguished after accounting for the interest payable periodically. Mortgage loans and vehicle loans are usually amortized over the term of the loan.