Question

What do you mean by ARR and how can it be calculated? State the advantages and disadvantages of ARR?

Answer 1

the full form of APR is ANNUAL PERIOD RETURN

some people technically calls it NOMINAL RATE OF RETURN

as it is an annual rate it is calculated as a percent for year irrespective of no. of times compounded

which means APR = MONTHLY RATE x 12

OR , APR = QUARTERLY RATE x 4

OR , APR = SEMI-ANNUALLY RATE x 2

let us take an example

if an investment provides 2% return per MONTH

IT MEANS , APR = 2% x 12 = 24%

now we discuss about its advantages

as it is generalised in talking language

and it is very helpful if cash flow terms and no. of times compounded MATCHES

NOW WE DISCUSS ABOUT ITS DISADVANTAGES

as it gives a vague (unclear) view about interest

as it where no. of times compounded increases the EFFECTIVE RATE increases

and when cash flow terms and no. of times compounded DOES NOT MATCH

it becames very difficult to calculate actual rate or return