FINS help please (1 Viewer)

[wantingtoknow]

Can someone clarify the difference between EAR and APR please? I've tried googling but couldn't really find a simple, easy to understand answer ><

Thank you!

 

[Shadowdude]

this is for fins1613, right?

 

[wantingtoknow]

yes, it is!

 

[Trans4M]

APR (Annual percentage rate) refers to the nominal interest rate the bank tells you it will give you for that year. For e.g. 12% per annum.

However, most banks do not charge interests annually, they in fact charge interest monthly. Hence you actually do not gain 12% of interest if you put in $100 at the beginning of the year. You will get more than that. If I did this manually by month at the end of the year, my $100 will be worth $100 x (1 + 0.12/12)^12 = 112. 68. So my real interest is actually 12.68% and not 12% like the bank said.

The 12.68% is the EAR (effective annual rate). SO basically EAR is converting APR into the real interest rate and not the nominal rate. Hope that makes sense

well it doesnt necessarily only applies to banks but I used banks as it is the most common example people use.

 

[Internet_Police]

APR (Annual percentage rate) refers to the nominal interest rate the bank tells you it will give you for that year. For e.g. 12% per annum.

However, most banks do not charge interests annually, they in fact charge interest monthly. Hence you actually do not gain 12% of interest if you put in $100 at the beginning of the year. You will get more than that. If I did this manually by month at the end of the year, my $100 will be worth $100 x (1 + 0.12/12)^12 = 112. 68. So my real interest is actually 12.68% and not 12% like the bank said.

The 12.68% is the EAR (effective annual rate). SO basically EAR is converting APR into the real interest rate and not the nominal rate. Hope that makes sense

well it doesnt necessarily only applies to banks but I used banks as it is the most common example people use.

I know what you are trying to say, but you did not pick the best words to express yourself. To be more correct, EAR is the "interest rate you actually pay".

When you say "real interest rate" you are technically referring to a nomial rate less inflation.

 

[Trans4M]

I know what you are trying to say, but you did not pick the best words to express yourself. To be more correct, EAR is the "interest rate you actually pay".

When you say "real interest rate" you are technically referring to a nomial rate less inflation.

haha yea i expressed myself poorly my bad XD it has been a while since I touched finance so kinda losing my stuff.