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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 compounding the monthly interest rate over the year. This rate is sometimes called the Annual Percentage Yield in the U.S., or effective annual rate in Europe. In DreamCalc, calculation of effective annual rates do not take into consideration an initial fee.
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 Annual & Monthly Rates
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
See also: TVM Compound Interest Calculations
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