Chapter 5 Interest Rates

AT a Glance

  1. LO1 Discuss how financial institutions quote and compute the effective annual rate on a loan or investment.

    Advertised interest rates—also called annual percentage rates (APRs)—are stated on an annual basis and are nominal interest rates. A nominal rate is one that has been adjusted for inflation when compared with the real rate of interest. Interest rates can be applied annually, semiannually, quarterly, monthly, weekly, or even daily. These rates are periodic interest rates: the APR divided by the number of compounding periods per year.

    The effective annual rate (EAR) is the rate of interest actually paid ...

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