How to Calculate Annual Equivalent Rate

Written by bradley james bryant
  • Share
  • Tweet
  • Share
  • Pin
  • Email
How to Calculate Annual Equivalent Rate
Calculating annual equivalent rate or APR (calculator image by L. Shat from Fotolia.com)

The annual percentage rate is the rate charged for borrowing funds over a one-year time period. The rate is inclusive of fees and other transaction costs associated with the loan. The APR, or the annual equivalent rate, allows lenders to standardise rates, which provides borrowers with a number that can be used as a basis for comparison. By law, the APR must be shown to customers. This amount is not the same as annual percentage yield, which takes compounding into consideration.

Skill level:
Moderately Easy

Other People Are Reading

Things you need

  • Calculator or spreadsheet

Show MoreHide

Instructions

  1. 1

    Determine the periodic rate. This is the rate as quoted, also known as the nominal rate. For this example, assume the periodic rate is 10 per cent.

  2. 2

    Determine the number of periods the investment pays in the year. For instance, most bonds pay interest on a semiannual basis. This translates into two payments per year. Other investments pay on a monthly basis, which translates into 12 payment periods. Let's say you have a bond which pays on a semi-annual basis, and you need to calculate the annual equivalent rate.

  3. 3

    Determine the annual equivalent rate. Multiply the periodic rate by the number of periods in the year. For instance, in this example, the calculation is .10 x 2 = .20 or 20 per cent.

Don't Miss

References

Filter:
  • All types
  • Articles
  • Slideshows
  • Videos
Sort:
  • Most relevant
  • Most popular
  • Most recent

No articles available

No slideshows available

No videos available

By using the eHow.co.uk site, you consent to the use of cookies. For more information, please see our Cookie policy.