Effective period interest rate calculation formula:
Effective Period Rate (%) = Nominal Annual Interest Rate (%) / N
N – number of periods per year.
Example #1:
Nominal Annual Interest Rate, compounded yearly = 12% (or 0.12)
So,
N = 1
Effective Period Rate = 0.12 / 1 = 0.12 x 100% = 12%
Example #2:
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Nominal Annual Interest Rate, compounded monthly = 12% (or 0.12)
So,
N = 12
Effective Period Rate = 0.12 / 12 = 0.01 x 100% = 1%
Effective annual interest rate calculation formula:
Effective Rate (%) = (1 + Nominal Annual interest Rate (%) / N)N – 1
N – number of periods per year.
Example #3
Nominal Annual Interest Rate, compounded monthly = 15% (or 0.15)
So,
N = 12
Effective Rate = (1 + 0.15 / 12)12 – 1 = 0.16075 x 100% = 16.08%
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