Hi all
I’m trying to understand an long-standing issue I have with APR (nominal rate) vs the effective.
I understand the concept about compounding. But in a real life application, I have issued a loan, where the 12% is nominal p.a. on a 360 day basis paid quarterly for 1 year. The math shows that the effective annual rate is 12.6%.
But as the lender, does the borrower pay the lender 12.6% x 90/360 in cash interest every quarter? or 12% x 90/360?
Thanks
Thank you kind sir
So to confirm my understanding, the cash interest that I receive as a lender/debt provider is 12% x 90/360.
To add, as the debt provider/debt investor, though the cash interest received is 12% x 90/365, my financial return is 12.6%, on a compounded return basis / IRR? and the convention is to quote annualized figure i suppose?
I’m trying to clear up my conceptual concepts here:
"Annual percentage yield (APY) (or in CFA, its the effective annual yield/rate,IRR) —
The annual amount you actually pay… , including compounding and other charges, expressed as a percentage of the loan amount. This is the most comprehensive measure of the cost of a loan, but because it includes non-guaranteed fees, it often can’t be calculated until after a loan is repaid. "(https://napkinfinance.com/napkin/whats-apr/)
Put differently, i’m trying to close my knowledge gap here. where does the additional 0.6% come from, if I receive/the borrower pays 12% x 90/360. lets not even talk about the additional yield that 365/360 generates first.