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APYs and APRs

Dr. Don TaylorDear Dr. Don,
I see a yield on a one-month CD at 1.15 percent. Is that a yearly yield being quoted or is the 1.15 percent a monthly return, in the case of a one-month CD?
-- Chris Certificate

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Dear Chris,
The return is an annualized return. Putting returns on an annualized basis allows you to compare across investments. That's the logic behind financial institutions posting annual percentage yields (APY) when advertising interest rates on deposits, as required by the Truth in Savings Act. A 1.15 percent monthly return would be close to 15 percent as an annualized yield.

Dear Dr. Don,
Do the average interest rates displayed on the Bankrate Web site take into consideration the points associated with the rate? (Is it calculated assuming zero points?)
-- Tom

Dear Tom,
Bankrate provides both the nominal rate and the annual percentage rate for the mortgage rates listed on its Web site. The nominal rate is the interest rate used to calculate the mortgage payment, while the APR includes a projection of fees and any points paid to provide an estimate of the all-in cost. Here's what Bankrate's glossary says about the APRs for fixed- and adjustable-rate mortgages:

APR -- For fixed-rate mortgages, the annual percentage rate will be higher than the note rate because the APR is figured in a standard way to reflect the true annual cost of borrowing, including points and closing costs. Consumers can use the APR to make 'apples to apples' comparisons.

For adjustable-rate mortgages, a fully-indexed APR is used that is based on a comparison that is made at each adjustment date of the 'then current' rate plus 2 percent vs. the margin plus the index. As part of this calculation, the index is assumed to remain constant throughout the life of the loan. When the underlying indexes are low, it is possible for the fully-indexed APR to be lower than the starting rate on the loan.

Two fixed-rate mortgages with the same nominal rate will have different APRs if one charges zero points and the other requires the borrower to pay points.


-- Posted: Oct. 27, 2004




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