The second is that the effective annual rate

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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 saving...
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