Which of the following statements is true of the annual percentage rate (APR)?

1. Which of the following statements is true of the annual percentage rate (APR)?

A) The APR is similar to the quoted interest rate which is a simple annual rate.

B) The APR calculation adjusts for the effects of compounding and, hence, the time value of money.

C) The APR is the true cost of borrowing and lending.

D)The APR takes compounding into account.

Answer: The correct options are B and D.

The APR has been defined as an annualized percentage rate to express the true cost or amount of any credit advance or funds made available, including the interest rate and charges; it incorporates the compound interest calculations. As opposed to the quoted interest rate it is easy to get a raw number usually an Annual rate, while APR takes into consideration the compounding period obviously in a year or whatever period is valid according to the contract signed. Due to the incorporation of the time value of money, APR has proven to be a better measure because it shows the actual amount of interest paid or received. They are both right, statement B and statement D because the APR calculation takes into consideration the issue of compounding of interest.