annualized percentage rate of interest

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A rate of interest that allows comparison between loan contracts with different terms and payment structures. The APR is defined as the rate of interest that equates the present discounted value of funds received to the present discounted value of payments made. Assume a loan contract provides £120 now (time 0) and £120 in two years' time, and is repaid with five biannual payments of £50 beginning six months from now. The APR, denoted by r, is then defined as the solution to The APR in this case is r = 0.082 (8.2 percent). Where a loan is repaid in instalments and the nominal interest rate is expressed as a percentage of the original capital, the APR may be considerably higher than the nominal interest rate. In the UK lenders are legally obliged to inform borrowers of the APR on mortgage, credit card, or other loans.

Subjects: Economics.

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