The Average Prime Rate (APR) is calculated by adding 3% to the federal funds target rate. It represents the average interest rate that banks charge their most creditworthy customers. Understanding the APR is crucial for borrowers to gauge the cost of loans and for investors to assess the economic environment.
The formula to calculate the Average Prime Rate (APR) is:
\[ APR = FFTR + 3\% \]
Where:
Let's say the federal funds target rate is 5.50%. Using the formula:
\[ APR = 5.50 + 3 = 8.50 \]
So, the Average Prime Rate (\( APR \)) is 8.50%.
Definition: The prime rate is the interest rate that commercial banks charge their most creditworthy customers. It is influenced by the federal funds rate.
Formula: \( \text{Prime Rate} = \text{Federal Funds Rate} + 3\% \)
Example: \( \text{Prime Rate} = 5\% + 3\% \)
Definition: This calculator estimates the interest rate based on the prime rate and an additional percentage.
Formula: \( \text{Interest Rate} = \text{Prime Rate} + \text{Additional Percentage} \)
Example: \( \text{Interest Rate} = 8\% + 2\% \)
Definition: This calculator estimates the interest rate for real estate loans based on the current prime rate and an additional percentage.
Formula: \( \text{Real Estate Interest Rate} = \text{Prime Rate} + \text{Additional Percentage} \)
Example: \( \text{Real Estate Interest Rate} = 7\% + 1.5\% \)
