Interest Rate Concepts and Calculations Flashcards
Define “annual percentage rate (APR)”.
- The annualized effective interest rate (without compounding) on loans that are for a fraction of a year. In effect, the effective interest rate for a portion of a year is “grossed up” to an annual rate.
- Computed as the effective interest rate for the fraction of a year multiplied by the number of such fractions in a whole year.
- Basis of interest rate disclosures in U.S.
Define a “variable interest rate”.
The percentage rate of interest can change over the life of the related debt instrument.
Define “effective interest rate”.
- The annual interest rate implicit in the relationship between the net proceeds of a borrowing (or other arrangement) and the dollar cost of the borrowing (or other arrangement).
- Computed as: Dollar cost of borrowing/Net proceeds of borrowing
Define a “fixed interest rate”.
The percentage rate of interest does not change over the life of the loan or parts of that life.
Define “effective annual percentage rate” (also allied the “annual percentage yield”).
Annual percentage rate with compounding on loans that are for a fraction of a year.
Define “stated rate (of interest)”. (also used interchangeably as “nominal rate” or “quoted rate”).
The annul rate of interest specified in a debt instrument or other contract/agreement; it does not take into account the compound effects of payment frequency.
Define “simple interest”.
Interest computed on the principal only; there is no compounding in the interest computation (i.e., no interest paid on interest).
Define “compound interest”.
Interest computed not only on the principal but also on any accumulated unpaid interest (i.e., interest is paid on interest).
Define “interest”.
Cost of the use of money. Expresses as a percentage rate, almost always as an annual percentage rate, applied to the principal to determine dollar amount.
