   Chapter 5, Problem 7Q Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

Banks and other lenders are required to disclose a rate called the APR. What is this rate? Why did Congress require that it be disclosed? Is it the same as the effective annual rate? If you were comparing the costs of loans from different lenders, could you use their APRs to determine the loan with the lowest effective interest rate? Explain.

Summary Introduction

To explain: The annual percentage rate, the requirement of its disclosure, the similarity of it with the effective annual rate and whether it is used to determine the lowest effective interest rate of the loans.

Introduction:

Annual Percentage Rate: The annual percentage rate is a rate at which an investment is borrowed or earned. This rate expresses the value which is the cost of the funds for the term of the loan in percentage. A lower annual percentage rate is preferred for a loan or an investment.

Explanation
• The annual percentage rate is the nominal rate of an investment or a loan.
• This rate is needed to be disclosed as the points included in a loan agreement must be known to the customer.
• The effective annual rate is that rate on which loans are actually given, the calculation of the effective annual rate includes the annual principal rate...

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