Question

True/False

15) The "Truth in Savings Law" requires banks to advertise their rates on investments such as CDs and savings accounts as annual percentage yields (APY).

16) When quoting rates on loans, the "Truth in Lending Law" requires the bank to state the rate as an APR, effectively understating the true cost of the loan when interest is computed more often than once a year.

Answer 1

15)True. The truth in savings law requires banks to advertise their rates on investments such as CDs and savings accounts as annual percentage yields (APY). This Act requires uniform disclosure of rates of interest in APY. This law was passed in December 1991. It became effective in 1993. Annual percentage yield shows the total amount of interest paid which takes into account frequency of compounding also. It shows interest rate based on compounding period of a year. APY is also sometimes known as effective annual rate. An example in shown at last.

16) True. When quoting rates on loans, the "Truth in Lending Law" requires the bank to state the rate as an APR, effectively understating the true cost of the loan when interest is computed more often than once a year. The truth in lending law of 1968 is a US law designed to make consumers make informed decision and standardise disclosure of costs.

Effective annual rate EAR is given by (1+APR/m)^m -1 where m is the number of times compounding happens in a year. If APR is 6% compounded semi-annually then EAR is (1+0.06/2)^2 - 1 = 1.03^2 - 1 = 6.09%. Thus APR results in understating the rates or cost of a loan.

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