Annual percentage rate

Definition

Annual Percentage Rate (APR) is the yearly interest rate charged on borrowed funds, expressed as a percentage. It includes any fees or additional costs associated with the transaction.

5 Must Know Facts For Your Next Test

1. APR is used to compare different loan offers by standardizing interest rates and fees.
2. The APR for a bond or other long-term liability can impact its attractiveness to investors.
3. In financial accounting, APR helps in understanding the true cost of borrowing over time.
4. Regulations often require lenders to disclose the APR to ensure transparency for borrowers.
5. Differences between nominal interest rates and APR are due to compounding periods and additional fees.

Review Questions

Related terms

Nominal Interest Rate: The interest rate stated on a loan or bond without taking into account any fees or compounding of interest.

Effective Annual Rate (EAR): The actual annual return on an investment or cost of a loan after accounting for compounding within the year.

Compounding Period: The frequency with which interest is applied to the principal balance of a loan or investment within a specific period.