Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance)
Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance)
3rd Edition
ISBN: 9780133507676
Author: Jonathan Berk, Peter DeMarzo, Jarrad Harford
Publisher: PEARSON
Question
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Chapter 5, Problem 1CC
Summary Introduction

EAR (Effective Annual Rate): The effective interest rate refers to the rate of interest that is paid on an investment or loan or bonds after to take into consideration of compounding over a period of time.

APR (Annual Percentage Rate): The annual percentage rate refers to the rate of interest at which the annual simple interest is calculated.

To Explain: The difference between the effective annual rate and annual percentage rate.

Answer:

The main difference between both is the effective annual rate calculates the compound interest and the annual percentage rate calculates the simple interest for a specific period.

Expert Solution & Answer
Check Mark

Explanation of Solution

Difference between EAR and APR

S. No.BasisEffective Annual RateAnnual Percentage Rate
1.DefinitionThe effective annual rate is the interest rate charged on an amount annually, to take account of compounding during the year.Annual percentage rate is simple interest rate charged on an amount annually, without taking account of the compounding during the year.
2.BaseWith the help of effective annual rate compound interest can be calculated.With the help of annual percentage rate, simple interest can be calculated.
3.UseThe effective annual rate is used for the evaluation of compounding loans like Credit card bills, mutual fund investments.The annual percentage rate is used for the evaluation of mortgage and auto loans.
4.Interest occurrenceThe interest which occurs at the regular intervals like monthly or quarterly is calculated at the effective annual rate.The interest for a specific year can be calculated with the help of annual percentage rate.
Conclusion

The effective annual rate and annual percentage rate both are different from each other mainly on the basis of the calculation of different interests.

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Chapter 5 Solutions

Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance)

Ch. 5 - Prob. 3CTCh. 5 - Prob. 4CTCh. 5 - Prob. 5CTCh. 5 - Prob. 6CTCh. 5 - Prob. 7CTCh. 5 - Prob. 8CTCh. 5 - Prob. 9CTCh. 5 - Your bank is offeringyou an account that will pay...Ch. 5 - 3. You are looking to buy a car and you have been...Ch. 5 - 4. You are considering two ways of financing a...Ch. 5 - 6. Which do you prefer: a bank account that pays...Ch. 5 - 7. You have been offered a job with an unusual...Ch. 5 - You have found three investment choices for a...Ch. 5 - 9. Your bank account pays interest with an EAR of...Ch. 5 - 10. Suppose the interest rate is 8% APR with...Ch. 5 - Prob. 9PCh. 5 - Prob. 10PCh. 5 - Prob. 11PCh. 5 - 14. Suppose Capital One is advertising a 60-month,...Ch. 5 - Ironwood Bank is offeringa30-year mortgage with an...Ch. 5 - 17. You have just taken out a $20,000 car loan...Ch. 5 - 19. You are buying a house and the mortgage...Ch. 5 - 20. You have decided to refinance your mortgage....Ch. 5 - 21. You have just sold your house for $1,000,000...Ch. 5 - Prob. 18PCh. 5 - 23. You are thinking about leasing a car. The...Ch. 5 - 24. You have some extra cash this month and you...Ch. 5 - 25.You have an outstanding student loan with...Ch. 5 - 25. You have an outstanding student loan with...Ch. 5 - 27. Oppenheimer Bank is offering a 30-year...Ch. 5 - 28. Your friend tells he has a very simple trick...Ch. 5 - 29. The mortgage on your house is five years old....Ch. 5 - Prob. 26PCh. 5 - Your firm has taken out a $500,000 loan with APR...Ch. 5 - 32. Five years ago you took out a 5/1 adjustable...Ch. 5 - 33. In 1975, interest rates were 7.85% and the...Ch. 5 - 34. If the rate of inflation is 5%, what nominal...Ch. 5 - Prob. 31PCh. 5 - Prob. 32PCh. 5 - 37. You are pleased to see that you have been...Ch. 5 - 38. What is the shape of the yield curve given in...Ch. 5 - Prob. 35PCh. 5 - Prob. 36PCh. 5 - Prob. 37P
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