Effective interest rate calculation

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:

Nominal Annual Interest Rate, compounded monthly = 12% (or 0.12)

So,

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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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