Effective interest rate calculation.
Effective period interest rate calculation
The effective period interest rate is equal to the nominal annual interest rate divided by the number of periods per yearn:
Effective Period Rate = Nominal Annual Rate / n
Example
What is the effective period interest rate for nominal annual interest rate of 5% compounded monthly?
Solution:
Effective Period Rate = 5% / 12months = 0.05 / 12 = 0.4167%
Effective annual interest rate calculation
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
What is the effective annual interest rate for nominal annual interest rate of 5% compounded monthly?
Solution:
Effective Rate = (1 + 5% / 12)12 - 1
= (1 + 0.05 / 12)12 - 1
= 0.05116 = 5.116%
Effective interest rate calculator ►
Would you like to share your thoughts?