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Explain the impact of compounding frequency and the difference between annual percentage rate and the effective...

Explain the impact of compounding frequency and the difference between annual percentage rate and the effective annual rate.

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Answer #1

The higher the compounding frequency, the higher is the accumulated or future value given a present value or lower is the present value required to accumulate a given present value.

The primary difference between annual percentage rate (APR) and the effective annual rate (EAR) is that the APR is based on the simple interest, but the EAR accounts for compound interest. APR is most useful in evaluating mortgage & auto loans, but EAR is most useful in evaluating credit cards or frequently compounding loans.

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