Interest rates
The Nominal Annual Rate displayed on the cash flow data screen and the rates displayed in the Include Rates group on the Amortization Schedule Report ribbon all correspond directly with each other. Each is described in more detail below. Another rate calculated by TValue is the Annual Percentage Rate (APR). This is an interest rate that every lender is required to reveal in its statement to the borrower. The APR can be displayed on the amortization schedule.
The Nominal Annual Rate is typically quoted when talking about interest rates. If the compound period is Annual, the Nominal Annual Rate is equal to the Effective Annual Rate, which is also equal to the Periodic Rate. If the compound period is Monthly, the Nominal Annual Rate is equal to 12 times the Periodic Rate.
The Nominal Annual Rate is closely related to the APR, which is a required disclosure in truth-in-lending statements. When there are no points, other finance charges, or rate changes, the amount financed equals the face amount of the loan and the two rates are identical. Where there are points or other finance charges, the amount financed is less than the face amount of the loan. In such cases, the APR is higher than the Nominal Annual Rate because, for a given series of payments, the borrower is receiving the use of less than the face amount of the loan.
The Effective Annual Rate is equal to the Nominal Annual Rate if the compound period is Annual. In all other cases, (where the interest rate is positive) the Effective Annual Rate is greater than the Nominal Annual Rate because of the effects of compounding.
Calculated as (1 + i)m - 1, where i is the Periodic Rate and m is the number of compound periods per year. The Effective Annual Rate would show, for example, the cost of borrowing one dollar for one year, where compounding is more frequent than Annual. This rate is often referred to as the "yield".
Example: If you borrow $100.00 at a Nominal Annual Rate of 12 percent with Monthly compounding, at the end of one year you will owe $112.68 ($100.00 principal plus interest of $12.68). The effective rate is 12.68 percent while the Nominal Annual Rate is 12 percent. In some cases, the effective rate provides a more accurate representation of the yield.
The Effective Annual Rate is not defined for the Exact Days compound period or U.S. Rule. The Exact Days compound period does not compound interest on a regular basis, so the Effective Annual Rate is not defined. The U.S. Rule Compute Method does not compound interest on unpaid interest, so it is also undefined.
The Periodic Rate (rate per compound period) is the rate that is multiplied times the balance at the beginning of a compound period. This rate times the number of compound periods per year gives the Nominal Annual Rate. For example, if compounding is Monthly and the Periodic Rate is 1 percent, the Nominal Annual Rate is 12 percent.
The Daily Rate is defined as 1/365 of the Nominal Annual Rate for a 365-day year, 1/364 of the Nominal Annual Rate for a 364-day year, or 1/360 of the Nominal Annual Rate for a 360-day year. This rate is used for computing interest for odd days or stub periods, and for daily interest calculations.