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APR Formula:
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APR (Annual Percentage Rate) represents the real annual cost of funds over the term of a loan or income earned on an investment, including any fees or additional costs associated with the transaction. For savings accounts, it shows the actual annual return when compounding is taken into account.
The calculator uses the APR formula:
Where:
Explanation: The formula accounts for the effect of compounding interest, showing the true annual rate when interest is compounded multiple times per year.
Details: APR allows for accurate comparison between different savings products with different compounding frequencies. A higher compounding frequency leads to a higher effective return, even with the same nominal rate.
Tips: Enter the nominal interest rate as a decimal (e.g., 0.05 for 5%) and the number of compounding periods per year (e.g., 12 for monthly compounding). All values must be positive numbers.
Q1: What's the difference between APR and APY?
A: APR doesn't account for compounding within the year, while APY (Annual Percentage Yield) does. For savings accounts, APY is typically shown as it represents the actual earnings.
Q2: How does compounding frequency affect returns?
A: More frequent compounding leads to higher effective returns. For example, monthly compounding (m=12) yields higher returns than annual compounding (m=1) at the same nominal rate.
Q3: What are typical compounding frequencies?
A: Common frequencies include annually (1), semi-annually (2), quarterly (4), monthly (12), weekly (52), and daily (365).
Q4: Why is my APR higher than the nominal rate?
A: This occurs due to compounding - you earn interest on previously earned interest, which increases your effective annual rate.
Q5: How can I compare two savings accounts?
A: Convert both to APR using the same compounding frequency, or better yet, compare their APYs which already account for compounding differences.