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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 1,292,283 times. Reader Success Stories
Did this article help you?What effective rate is equivalent to a nominal rate of 11% compounded quarterly?Effective Interest Rate Table. What is the effective interest rate corresponding to a nominal rate of 10% compounded quarterly?Below is a breakdown of the results of these different compound periods with a 10% nominal interest rate: Semiannual = 10.250% Quarterly = 10.381% Monthly = 10.471%
How do you find the effective interest compounded quarterly?The effective interest rate is calculated through a simple formula: r = (1 + i/n)^n - 1. In this formula, r represents the effective interest rate, i represents the stated interest rate, and n represents the number of compounding periods per year.
What is the effective interest rate when the nominal interest rate of 10% is?In this case, the nominal annual interest rate is 10%, and the effective annual interest rate is also 10%. However, if compounding is more frequent than once per year, then the effective interest rate will be greater than 10%. The more often compounding occurs, the higher the effective interest rate.
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