Annual percentage rate (APR)

Definition

The Annual Percentage Rate (APR) is the yearly interest rate charged on borrowed money or earned through an investment, expressed as a percentage. It includes fees or additional costs associated with the transaction.

5 Must Know Facts For Your Next Test

1. APR can be calculated using the formula $APR = (1 + \frac{r}{n})^n - 1$, where $r$ is the nominal rate and $n$ is the number of compounding periods per year.
2. APR is used to compare different loan offers by providing a standardized measure of the cost of borrowing.
3. Higher APRs result in higher total interest paid over the life of a loan.
4. In exponential functions, APR can be represented as part of compound interest calculations using $A = P(1 + \frac{r}{n})^{nt}$.
5. Understanding APR helps in making informed financial decisions, such as choosing credit cards or loans.

Review Questions

• How do you calculate APR using exponential functions?
• Why is APR important when comparing different loan offers?
• What role does APR play in compound interest formulas?

Related terms

Compound Interest: Interest calculated on both the initial principal and the accumulated interest from previous periods.

Nominal Interest Rate: The stated interest rate before any adjustments for compounding or fees.

Effective Annual Rate (EAR): The actual annual rate earned or paid after accounting for compounding within a given year.