Hello

I'm doing some work on calculating APR and i am reading this document

http://www.creditunion.ie/files/file_20050316024652OFT%20-%20Credit%20Charges%20and%20APR.pdf

Could i ask what this means on the bottom on page 45

"As this equation shows, at the correct annual rate, the present value of the

repayment is equal to the amount advanced. This is generally referred to as

the ‘present value rule’"

To me this is saying that PV = A at the 'correct annual rate'

What does it mean 'correct annual rate'?

To me PV = A when (1+i)^t is equal to 1

Is this what it is saying? I do not understand what it means by correct annual rate

I'm doing some work on calculating APR and i am reading this document

http://www.creditunion.ie/files/file_20050316024652OFT%20-%20Credit%20Charges%20and%20APR.pdf

Could i ask what this means on the bottom on page 45

"As this equation shows, at the correct annual rate, the present value of the

repayment is equal to the amount advanced. This is generally referred to as

the ‘present value rule’"

To me this is saying that PV = A at the 'correct annual rate'

What does it mean 'correct annual rate'?

To me PV = A when (1+i)^t is equal to 1

Is this what it is saying? I do not understand what it means by correct annual rate

I am going through the booklet in the other question as I don't understand the answers and that led to this question. I'm really sorry for being stupid but I don't really get it. I don't know anything about loans and finance so I don't even know the terminology. So to be honest, I'm just as confused by your answer - if not more :( sadly - as you have used slightly different terminology from the booklet. Perhaps I now need to open a different question to clarify the terminology but I know the quality of the forum is important and I dont want to create a jumbled heap of questions.

I've obviously misunderstood but i thought it meant PV was the value you borrowed and A is essentially the amount you are going to pay back in total, but the booklet then refers to PV as the 'present value of the repayment.' In your answer you also refer to 'present value of advance' which further confounds me as this isnt a term in the explanation of the previous pages either.

Thanks for answering

I think their interpretation is a good path to explore. In essence, it appears you have an annuity that you make payments to and receive advances for. Maybe I am reading it wrong, but it would appear you need to find the interest rate (IRR) that makes the net present value (NPV) 0.

The link to the wiki page on NPV should help.

I've looked at their answers and it makes sense. The problem I am having is that I dont really understand this field and I really dont know how far i need to understand it either to just implement something. I get different answers on every online calculator/excel spreadsheet i try for even for simple loan repayment calcualtions (i've got another question on this) yet alone apr calculations. But then the loan repayment calculations feed into the apr calculation. Furthermore I get different answers depending on whether i use binary chop or newton rhapson for apr. It seems a minefield!

Understanding Net Present Value and Internal Rate of Return in various forms is basically the first year of business school. It can be very simple, such as calculating the yield on a bond bought at discount and redeemable at par some years later. Or it can be as complex and uncertain as buying a rental property, where there may be many cash flows, both in and out, representing the purchase price, taxes, rents and gross uncertainties (what if the tenants cause a fire?). The Net Present Value is a measure of the magnitude of the investment. The Internal Rate of Return is a measure of the yield, where higher numbers are better.

I haven't read all of it, but this article looks pretty accurate.

http://en.wikipedia.org/wiki/Internal_rate_of_return

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http://en.wikipedia.org/wiki/Net_present_value#Formula

Therefore, you are seeking the present value of the advance (A) here. In other words, the present value of the advance equals the present value of the annuity payment at a specific rate of return. If you do not use the correct interest rate, these values will not equal.