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How to Calculate Annual Equivalent Rate

2014-02-19   Views:2

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The annual percentage rate is the rate charged for borrowing funds over a one-year time period. The rate is inclusive of fees and other transaction costs associated with the loan. The APR, or the annual equivalent rate, allows lenders to standardise

How to Calculate Annual Equivalent Rate

The annual percentage rate is the rate charged for borrowing funds over a one-year time period. The rate is inclusive of fees and other transaction costs associated with the loan. The APR, or the annual equivalent rate, allows lenders to standardise rates, which provides borrowers with a number that can be used as a basis for comparison. By law, the APR must be shown to customers. This amount is not the same as annual percentage yield, which takes compounding into consideration.

Skill level:Moderately Easy

Things you need

Calculator or spreadsheet

Instructions

1 Determine the periodic rate. This is the rate as quoted, also known as the nominal rate. For this example, assume the periodic rate is 10 per cent.

2 Determine the number of periods the investment pays in the year. For instance, most bonds pay interest on a semiannual basis. This translates into two payments per year. Other investments pay on a monthly basis, which translates into 12 payment periods. Let's say you have a bond which pays on a semi-annual basis, and you need to calculate the annual equivalent rate.

3 Determine the annual equivalent rate. Multiply the periodic rate by the number of periods in the year. For instance, in this example, the calculation is .10 x 2 = .20 or 20 per cent.

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