APR, or Annual Percentage Rate, is a crucial financial concept that represents the true cost of borrowing money over a year. It is distinct from the discount rate, which is the interest rate charged by a central bank to commercial banks. Understanding how to calculate APR from a discount rate is essential for individuals and businesses making informed financial decisions.
The formula for calculating APR from a discount rate is APR = Discount Rate / (1 – Discount Rate). For example, if the discount rate is 5%, the corresponding APR would be 5.26%. APR is significant because it provides a standardized measure of borrowing costs, allowing borrowers to compare different loan options and make appropriate choices.