How to calculate effective interest rate

Effective interest rate calculation.

Effective period interest rate calculation

So The  effective period interest rate is equal to the  nominal annual interest rate divided by the number of periods per year  n:

Effective Period Rate = Nominal Annual Rate / n

Example 1

What is the effective period interest rate for nominal annual interest rate of 4% compounded monthly?

Solution:

Effective Period Rate = 4% / 12months = 0.04 / 12 = 0.333%

Example 2

What is the effective period interest rate for nominal annual interest rate of 6% compounded monthly?

Solution:

Effective Period Rate = 6% / 12months = 0.06 / 12 = 0.500%

Example 3

What is the effective period interest rate for nominal annual interest rate of 10% compounded monthly?

Solution:

Effective Period Rate = 10% / 12months = 0.10 / 12 = 0.833%

Effective annual interest rate calculation

So The effective annual interest rate is equal to 1 plus the nominal interest rate in percent divided by the number of compounding persiods per year n, to the power of n, minus 1.

Effective Rate = (1 +  Nominal Rate /  n)n - 1

Example 1

What is the effective annual interest rate for nominal annual interest rate of 4% compounded monthly?

Solution:

Effective Rate = (1 + 4% / 12)12 - 1

      = (1 + 0.04 / 12)12 - 1

      = 0.04074 = 4.074%

Example 2

What is the effective annual interest rate for nominal annual interest rate of 6% compounded monthly?

Solution:

Effective Rate = (1 + 6% / 12)12 - 1

      = (1 + 0.06 / 12)12 - 1

      = 0.06168 = 6.168%

Example 3

What is the effective annual interest rate for nominal annual interest rate of 10% compounded monthly?

Solution:

Effective Rate = (1 + 10% / 12)12 - 1

      = (1 + 0.10 / 12)12 - 1

      = 0.04074 = 10.471%

 

 

Effective interest rate calculator ►

 


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