Calculating Annual Percentage Rate | ||||||
Calculating Annual percentage rate To calculate annual percentage rate, you use the following formula:
where i is the interest rate, expressed in decimal and m is the number of compounding periods per year. For example, say you wanted to borrow money for your small business and the bank or whoever the lender is, offers you 8% interest rate paid quarterly. By implication, this means you will be paying 4 times per year. Thus you have: i = 8/100 = 0.08 and To calculate your APR (Annual Percentage Rate): =>
=>[1 + 0.02] 4 – 1.0 =>1.082 – 1.0 =>.0824 =>8.24 % APR As you can see from the result here, the Annual percentage rate is almost always likely to be higher than the quoted rate. Lenders thus from what you can see here lenders are not likely to disclose that they will in fact charge you more than they are quoting you. But if you were using this formula within the context of your investment, instead of it being APR, it becomes APY (for Annual percentage yield). |
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