3.6. Comparing Interest Rates Flashcards
Define AER…
Annual equivalence rate.
Define EAR…
Effective annual return.
What is AER / EAR…
Shows the effect of compounding on savings products.
Required to be quoted on all savings products in the UK.
Define APR…
Annual percentage rate.
Define EAP…
Effective annual percentage.
What is APR / EAP…
Shows the effect of compounding on borrowing products.
Required to be quoted on all savings products in the UK.
AER / EAR equation…
And APR / EAP equation…
(1+r)^n -1.
Both use the same equation.
A bank pays 6.00% on savings, paid monthly. Find the EAR / AER…
AER = (1+0.005)^12 - 1
= 6.17%.
A bank pays 3.50% on savings, paid quarterly. What is the AER / EAR…
AER = (1+0.00875)^4 - 1
= 3.55%.
A bank provides a mortgage charging 0.90% interest, monthly. What is the APR…
APR = (1+0.009)^12 - 1
= 11.35%.
A bank includes a £1,000 set up fee on a £30,000 mortgage, charging 0.90% interest, monthly. What is the APR…
£29,000=£298.71 * PVAF (r, 300)
100.1001001 = PVAF (r, 300)
r = 0.009384
APR = (1+0.009384)^12 - 1
= 11.86%.
A car loan charges 6.9% APR on a £17,000 loan. What is the monthly repayment?
Using the present value of annuity formula, we can rearrange to find the cash flow element.
=£406.30.
