Question

What is the relationship between an annually compounded rate and the annual percentage rate (APR) which is calculated for truth-in-lending laws for a loan requiring monthly payments?

a. the APR is lower than the annually compounded rate.
b. the APR is higher than the annually compounded rate.
c. the APR equals the annually compounded rate.
d. the answer depends on the interest rate. the answer depends on the inflation rate.

Answer 1

The annual percentage rate (APR) for a loan requiring monthly payments is typically higher than the annually compounded rate.

Step-by-step explanation:

The relationship between an annually compounded rate and the annual percentage rate (APR) for a loan requiring monthly payments depends on the interest rate. In most cases, the APR will be higher than the annually compounded rate. This is because the APR takes into account any additional fees or costs associated with the loan, such as origination fees or closing costs. The APR is designed to provide borrowers with a more accurate representation of the total cost of borrowing.

For example, if the annually compounded rate is 5% and there are no additional fees or costs, the APR may also be 5%. However, if there are additional fees or costs, the APR could be higher, such as 5.5%.

In summary, the answer depends on the interest rate and any additional fees or costs associated with the loan.