Annual percentage rate (APR)

Definition

Annual Percentage Rate (APR) is the annual rate charged for borrowing or earned through an investment, expressed as a percentage. It represents the yearly cost of funds over the term of a loan or income earned on an investment.

5 Must Know Facts For Your Next Test

1. APR incorporates both the interest rate and any fees or additional costs associated with the transaction.
2. It is used to compare different loan products by providing a standardized measure of cost.
3. APR can be calculated using the formula $APR = r \cdot n$ where $r$ is the periodic interest rate and $n$ is the number of periods in a year.
4. For exponential growth calculations, APR can be converted to an effective annual rate (EAR) using $EAR = (1 + \frac{APR}{n})^n - 1$.
5. Understanding APR helps in solving problems involving exponential growth and decay in financial contexts.

Review Questions

• How does APR differ from a simple interest rate?
• What components are included in the calculation of APR?
• How can you convert APR to an effective annual rate (EAR)?

Related terms

Effective Annual Rate (EAR): The actual interest rate an investor earns or pays in a year after accounting for compounding.

Periodic Interest Rate: The interest rate charged on a loan or realized on an investment over a specific period.

Exponential Growth: $y = y_0 e^{kt}$, where $y_0$ is the initial amount, $k$ is the growth constant, and $t$ is time.