Guide to Analysing Companies

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ANALYST
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01 Essential Finance 10/11/06 2:21 PM Page 27

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Annualised percentage rate
A standard measure of the annual rate of interest which
enables rates on different instruments to be compared. Before the
annualised percentage rate (apr) became established as the yard-
stick for such calculations, consumers were easily confused.
loan sharks and unscrupulous salesmen would attempt to
gain an advantage by offering what seemed to be a lower rate
but which invariably was the rate for a shorter period. The apr
is calculated by the formula:
APR 
 [(1  
x
⁄
100
)
y
 1]
where x is the rate of interest quoted for a period of less than a
year (for example, 2% a month), and y is the number of such
periods during the year.
Annuity
Originally an investment that bought a fixed annual payment
for the investor (called an annuitant) until his or her death.
Americans usually refer to fixed annuities, which guarantee a
minimum regular payment, or variable annuities, which do not
but (in theory) can generate even greater returns. Over the
years the basic format has also been refined to include the fol-
lowing types.
 Joint annuity. The benefit continues throughout the
lifetime of two people (usually husband and wife) and
continues until both are dead.
 Tontine annuity. A joint annuity where the payment
increases as the number of annuitants decreases (that is,
when the husband dies the wife gets a bigger regular
payment, and vice versa). Named after Lorenzo Tonti, an
Italian-born banker who lived in France during the 17th
century, the aim is to provide for survivors.
 Deferred annuity. The regular payments are delayed
until after a certain specified period.