## How to calculate effective interest rate.

Effective interest rate calculation.

## Effective period interest rate calculation

The

effective period interest rateis equal to thenominal annual interest ratedivided 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 ►

## See also