How to calculate effective interest rate

 

Productive interest rate calculation.

Productive 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:

Productive Period Rate = Nominal Annual Rate / n

Example

What is the effective period interest rate for nominal annual interest rate of 5% compounded monthly?

Solution:

Productive Period Rate = 5% / 12months = 0.05 / 12 = 0.4167%

 

Productive 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.

Productive 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:

Productive Rate = (1 + 5% / 12)12 - 1

      = (1 + 0.05 / 12)12 - 1

      = 0.05116 = 5.116%

 

Productive interest rate calculator ►

 

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