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1. Explain why lending institutions are required to disclose the APR rate. 2. Distinguish between quoted...

1. Explain why lending institutions are required to disclose the APR rate.

2. Distinguish between quoted interest rate, interest rate per period, and effective annual interest rate.

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Answer #1

1. Lending institutions are required to disclose APR because Annual rate of interest is easier of customers , depositors and lenders to understand as compared to effective rate and interest rate per period.

2. Quoted interest rate is the APR or Annual interest rate . It does not take compounding into consideration. APR means Annual percentage rate which is quoted by banks and is the annual cost of compounding interest. Even semi-annual compounding or monthly compounding is stated in APR.  

When number of compounding is higher interest rate per period is calculated with quoted interest rate divided by number of compounding periods. Interest rate per period =APR/n where n is number of compounding

Effective annual interest rate is given by following formula EAR=(1+APR/n)^n-1 or EAR =(1+interest rate per period )^n -1.

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