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Interest rate is the cost of borrowing money calculated as a yearly percentage. For investors, interest rate is the rate earned on an investment as a yearly percentage. The simple interest rate is interest paid or received divided by loan or deposit. For example, $100 in annual interest on a $1,000 loan or deposit is a simple interest rate of 10%. Compounded interest rate is determined by the frequency of interest payments during the loan or deposit term. For example, a 10% loan or deposit that is compounded quarterly equals a compounded rate of 10.38%. If compounded daily, the compounded interest rate increases to 10.52%. (For CD investors, compounded interest rate is called annual percentage yield.) Effective interest rate, or annual percentage rate (APR), is the actual cost of borrowing. It includes fees and points you pay for a loan in the calculation. As a result, effective interest rate is higher than simple interest rate.
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