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Unformatted text preview: s products as a result of
“truth-in-savings laws.” At the consumer level, “truth-in-lending laws” require disclosure on credit
card and loan agreements of the annual percentage rate (APR). The APR is the
nominal annual rate found by multiplying the periodic rate by the number of
periods in one year. For example, a bank credit card that charges 1 1/2 percent per
month (the periodic rate) would have an APR of 18% (1.5% per month 12
months per year).
“Truth-in-savings laws,” on the other hand, require banks to quote the
annual percentage yield (APY) on their savings products. The APY is the effective
annual rate a savings product pays. For example, a savings account that pays 0.5
percent per month would have an APY of 6.17 percent [(1.005)12 1].
Quoting loan interest rates at their lower nominal annual rate (the APR) and
savings interest rates at the higher effective annual rate (the APY) offers two
advantages: It tends to standardize disclosure to consumers, and it enables financial institutions to quote the most attractive interest rates: low loan rates and high
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