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Download Article When analyzing a loan or an investment, it can be difficult to get a clear picture of the loan's true cost or the investment's true yield. There are several different terms used to describe the interest rate or yield on a loan, including annual percentage yield, annual percentage rate, effective rate, nominal rate, and more. Of these, the effective interest rate is perhaps the most useful, giving a relatively complete picture of the true cost of borrowing. To calculate the effective interest rate on a loan, you will need to understand the loan's stated terms and perform a simple calculation.
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ReferencesAbout This ArticleArticle SummaryX To calculate effective interest rate, start by finding the stated interest rate and the number of compounding periods for the loan, which should have been provided by the lender. Then, plug this information into the formula r = (1 + i/n)^n - 1, where i is the stated interest rate, n is the number of compounding periods, and r is the effective interest rate. Solve the formula, convert your answer to a percentage, and you're finished! To learn more from our Financial Advisor co-author, such as how to calculate a continuously compounding interest, keep reading the article! Did this summary help you? Thanks to all authors for creating a page that has been read 1,308,766 times. Reader Success Stories
Did this article help you?What is the effective annual interest rate if the nominal interest rate is 6% compounded monthly?Calculation. For example, a nominal interest rate of 6% compounded monthly is equivalent to an effective interest rate of 6.17%.
What is the effective annual interest rate when a nominal rate of 12% per year is compounded monthly?EAR Example
12683 or 12.683%, which is the effective annual interest rate. Even though the bank offered a 12% stated interest rate, your money grew by 12.683% due to monthly compounding. The effective annual interest rate allows you to determine the true return on investment (ROI).
Can nominal rate be equal to effective annual rate?Increasing the number of compounding periods increases the effective annual rate as compared to the nominal rate. To spin it in another light, an investment that is compounded annually will have an effective annual rate that is equal to its nominal rate.
What is the effective annual interest rate if nominal interest rate is 9% and compounding is done monthly?Answer and Explanation:
The calculated value of the effective annual interest rate is 9.38%.
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