Effective Annual Rates

APR in the United States

In the United States, APR is calculated by simply multiplying the periodic interest rate by the number of periods. Therefore, if the monthly rate is 1%, the equivalent APR is simply 12%. Indeed, DreamCalc supports in-line calculation of this input with the [12×] and [12÷] TVM function keys.

Other Countries

Europe & United Kingdom

In Europe, APR is calculated by converting the periodic interest rate to an effective annual rate. This technique is sometimes referred to as Annual Percentage Yield in the US. In this calculation, the annual rate is the equivalent to the compounded periodic rate over the year.

Canada

In Canada, the situation is a little more complex. A compounding frequency of 2 per year is used, even though there may be 12 payments per year.

Calculation of Effective Annual & Monthly Rates

Where monthly periodic rates are concerned, DreamCalc provides two functions for making European and Canadian annual rate calculations simple:

• EAR - Converts a monthly rate to an effective annual rate.
• EMR - Converts an effective annual rate to a monthly one.

These functions may be used with either European or Canadian rules, as specified in the Options Window.

European Example: Given a monthly rate of 1%, what is the equivalent effective annual rate?

Ensure the calculator is set to use the monthly rule for this calculation.

1.00 [EAR]
Displays: 12.68

Note that EMR is the reverse operation of EAR. Therefore, pressing [EMR] using the result of previous calculation will yield a value of 1.00.

Canadian Example: Given an annual rate of 9.5%, what is the equivalent monthly rate?

Ensure the calculator is set to use the Canadian rule for this calculation.

9.50 [EMR]
Displays: 0.78

The above examples assume the use of the RPN input mode. To perform the last calculation using prefix algebraic input, key in the following instead:

[EMR] 9.50
[ENTER]
Displays: 0.78