Quoted Rate vs. EAR vs. APR
[Pages:1]Quoted Rate vs. EAR vs. APR
When the compounding frequency corresponds with the payment frequency, we can also deal with things very easily. We see this in al the car loan and lease questions: When the compounding is monthly and the payments are monthly, we simply use 1/12th of the APR rate with each (monthly) interest period. In most cases and in most of these questions, you have not been asked to determine the EAR, although you should be able to.
When we have a problem is when the compounding frequency and the payment frequency are different. In the mortgage questions, we have this problem due to the regulation of mortgage interest calculations: The law says the lender can only compound semi-annually, whereas most of us pay our mortgages monthly. Therefore, by law, the EAR of the mortgage is the quoted rate compounded semiannually. Necessity dictates that we need to use a rate that, when compounded monthly, has the same EAR to comply with the law. Schematically, this looks like this:
Quoted Rate
1 We start with the Quoted Rate
with Semi-annual compounding gives
EAR
Monthly
gives
with compounding
2 We use the quoted
rate to compute the EAR
APR
3 From the EAR, we can derive
the APR rate used to determine the payments and interest.
To compute the APR, we need to determine the EAR first and then work back to the APR. One-twelfth of the APR will be our monthly rate.
................
................
In order to avoid copyright disputes, this page is only a partial summary.
To fulfill the demand for quickly locating and searching documents.
It is intelligent file search solution for home and business.
Related download
- quoted rate vs ear vs apr
- trid fee placement and tolerance chart
- protection factors for respirator selection
- assignedprotectionfactors
- important u s federal income tax information for
- vanterm vessel schedule gct canada
- international tariff general rules applicable air
- table of interest rate equivalents atb financial
- ba ii plus texas instruments
- tax calendar provisional tax and terminal tax dates for