Definition
“Per Annum” is a Latin term used in finance that means annually or per year. It is often used to describe the interest rate on a loan or investment over a one-year period. For instance, if an investment offers a 5% return per annum, it means it will yield 5% over one year.
Key Takeaways
- Per Annum is a Latin term used in finance that means “per year” or “each year”. It’s typically used to express rates, such as interest or growth.
- It helps to standardize calculations and comparisons, by converting all periods of time to an annual basis, making it much simpler to compare different periods.
- Norms like loan interest rates, investment returns, inflation rates and salaries are often expressed on a per annum basis, facilitating yearly financial planning and decision-making.
Importance
The finance term ‘Per Annum’ is crucial as it provides specificity to financial rates and allows for a more accurate comparison and calculation.
The term denotes a recurring event or action taking place every year.
In finance, this is integral when discussing interest rates, investment returns, or other financial metrics that recur annually.
By expressing rates as per annum, it standardises measurements on an annual basis and eliminates confusion that could stem from other time frames like monthly or daily.
Hence, it greatly impacts financial decision-making, facilitates better understanding of financial products or services, and contributes towards forecasting and financial planning.
Explanation
Per Annum serves a critical role particularly in the world of business and finance by adding time-based context to various financial figures, thus helping to standardize and compare financial values across different time frames. Commonly used in financial, banking, and investment arenas, it is a solid base for calculating interest rates, salaries, and any other quantities that change over time.
For instance, in the context of banking, per annum is pivotal in specifying the interest rates earned on savings accounts or being charged on loans, to enable consumers to accurately evaluate and compare various financial products. Moreover, Per Annum serves as an essential tool for investors and companies by allowing them to better evaluate the performance of investments or assets.
By commonly expressing rates of return or growth on investments, dividends, or profits on an annual basis, investors can compare the annualized performance of different assets or investments, thus assisting them in making informed decisions. Similarly, for a company considering multiple projects with different durations, a per annum perspective provides a more comparable and fair rate of return on these projects, aiding in better decision making.
Thus, ‘per annum’ acts as a crucial element for a more nuanced and comprehensive understanding of financial situations.
Examples of Per Annum
Savings Account Interest: When you open a savings account with a bank, the interest rate is often stated per annum or annually. For instance, if a bank offers a savings interest rate of 2% per annum, this means that at the end of the year, the bank will add 2% of your starting balance to your account as interest.
Mortgage Loan Interest: When you take a mortgage loan from a bank, the bank will charge you an yearly interest. For example, if a bank gives you a loan of $200,000 at
5% interest rate per annum, it means that you will have to pay $7,000 in interest in a year.
Business Growth Rate: Companies often report their growth rates on a per annum basis. If a business says that its revenue is growing at 4% per annum, this means that the revenue of the business is expected to increase by 4% at the end of the fiscal year compared to the revenue at the beginning of the year.
FAQs about Per Annum
What does Per Annum mean?
Per annum is a Latin term that translates to annually or each year. In finance, it is used to express the frequency with which interest is applied or paid over the period of a year.
How is Per Annum used in finance?
In finance, Per Annum is used to describe how often interest is applied or paid. For example, if a loan’s interest rate is 5% per annum, this means the interest is charged or paid at a rate of 5% per year.
Is Per Annum the same as APY?
No, Annual Percentage Yield (APY) is different from Per Annum. While Per Annum refers to the rate of interest charged or received annually, APY takes into account the effect of interest compounding over the year. Hence, APY gives a more accurate representation of your potential return on an investment or the cost of a loan.
Can Per Annum rates change over time?
Yes, Per Annum rates can change over time especially in a variable rate loan where the interest rate can fluctuate over the life of the loan, subject to market conditions. Borrowers and investors should always confirm and understand the terms of their agreement before signing.
Related Entrepreneurship Terms
- Annual Percentage Rate (APR)
- Compound Interest
- Simple Interest
- Fixed Interest Rate
- Variable Interest Rate
Sources for More Information
- Investopedia: A comprehensive source of financial information, it provides explanations of financial terms including Per Annum.
- Bankrate: A web-based financial advice platform, which regularly publishes articles and guides about a wide range of financial topics, including Per Annum.
- MarketWatch: An online finance platform which provides financial information, news, analysis, stock market data and more including information about Per Annum.
- Financial Express: A business news portal offering a wide variety of information on finance including Per Annum.
