Chartered Institute of Stockbrokers (CISI) Professional Practice Exam

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Which interest rate are lenders required to quote to enable comparisons?

Fixed interest rate
Annual percentage rate
Nominal interest rate
Real interest rate

The correct answer is: Annual percentage rate

Lenders are required to quote the annual percentage rate (APR) because it provides a comprehensive measure of the total cost of borrowing. The APR takes into account not just the nominal interest rate, but also any additional costs and fees associated with the loan, expressed on an annual basis. This allows borrowers to make direct comparisons across different lending products, as they can see the overall cost of borrowing in a standardized format. The significance of quoting the APR lies in its ability to give consumers a clearer picture of what they will actually pay over the life of the loan, facilitating informed decision-making. This can include various factors such as the interest rate, origination fees, points, and any other charges that can impact the total amount repaid. In contrast, other interest rates like fixed, nominal, or real rates do not encompass the totality of loan costs. A fixed interest rate specifically pertains to the stability of payments over the life of the loan but does not provide a comprehensive comparison tool. Similarly, nominal interest rates reflect the stated rate without considering compounding or fees, and real interest rates adjust for inflation, making them less relevant for direct loan comparisons.