Asked by Muhammad Ahmed on Jun 25, 2024
Verified
Using the example of a savings account, explain the difference between the EAR and the APR.
EAR
Effective Annual Rate, a comprehensive calculation of interest on a loan or investment, considering the effect of compounding.
APR
Annual Percentage Rate; the annual rate charged for borrowing or earned through an investment, accounting for compounding over the year.
Savings Account
A bank account where money is kept for savings purposes and earns interest over time.
- Differentiate between Annual Percentage Rate (APR) and Effective Annual Rate (EAR), understanding their consequences for both lenders and borrowers.
Verified Answer
ME
maria efstathiouJun 30, 2024
Final Answer :
The EAR is what you actually earn; the APR is a quoted rate. If interest is compounded during the year, the ending balance of a savings account cannot be calculated directly using the APR. Also, in the case of the savings account, the EAR will always be higher than the APR as long as the account is compounded more than once a year and the interest rate is greater than zero.
Learning Objectives
- Differentiate between Annual Percentage Rate (APR) and Effective Annual Rate (EAR), understanding their consequences for both lenders and borrowers.
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