Best explained this way:
1) a friend asks for a loan of $1,000 for a couple of months. You say, OK but I want 10% Interest when you pay me back! When you friend pays you back the $1,000 he or she has to add 10% of the initial loan which equals $1,100.00.
2) You go to the bank and want to open an account paying 5.45% per annum on a 6 month CD (Certificate of Deposit) You give the bank 10,000. When you cash in your CD in 6 months, you'll have earned -
1/2 of $545 or $272.50 -- how did that happen?
The bank is only paying 5.45% per YEAR - you only loaned the bank 10,000 for 1/2 year.
The Math:
5.45 divided by 12 months equals: 0.454 x 6 Months Equals 2.7249996 x 10,000 - 272.50 rounded off. Hope this helps
An interest rate as a percentage is the one flat rate you must pay. Interest rate per annum is a compound interest, determined every year that the loan (or whatever) has not been paid back. Say, if you owed me $100 with a 1% per annum interest rate. You have to pay me back $101. If you have not repaid the loan, the next year you would have to pay me an extra 1% of $101, and so on.
Thanks to : http://wiki.answers.com
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