Effective Interest Rate Formula

Formula

Effective rate = (1 + i / m )n - 1
Where
i = Annual nominal rate of interest
m = Number of compounding periods in a year
n = Number of compounding periods the rate is required for

Use

The effective interest rate formula calculates the rate of interest for a number of compounding periods (n) based on a nominal rate (i) compounded a number of times a year (m).

Effective Interest Rate Formula Example 2

If the nominal rate is 9% compounded quarterly, what is the effective rate for a 6 month period?

The effective interest rate for the 6 month period is calculated using the effective rate formula as follows:

Effective interest rate = (1 + i / m )n - 1
i = annual nominal rate = 9%
m = compounding periods in a year = 4
n = number of compounding periods the rate is required for = 2
Effective interest rate = (1 + 9% / 4 )2 - 1
Effective interest rate = 4.551% per six month period

Effective Interest Rate Formula Example 2

If the nominal rate is 8% compounded monthly, what is the effective rate for one quarter?

The effective interest rate for the one quarter is calculated using the effective rate formula as follows:

Effective interest rate = (1 + i / m )n - 1
i = annual nominal rate = 8%
m = compounding periods in a year = 12
n = number of compounding periods the rate is required for = 3 (one quarter)
Effective interest rate = (1 + 8% / 12 )3 - 1
Effective interest rate = 2.013% per quarter

The effective interest rate formula is one of many used in time value of money calculations, discover another at the link below.

Effective Interest Rate Formula November 6th, 2016Team

You May Also Like


Related pages


pv annuity tablehow to calculate stock turnover dayspresent value of a lump sum formulahow to calculate asset turnoverefficiency ratio inventory turnover formulasmall business inventory spreadsheet templateactivity ratio formulaexample of unearned revenueformat ledgertransactional analysis examplesbookkeeping accounts payable and receivablesample payment voucher formatthe expanded accounting equationprepaid income in balance sheetwhat is nperthe declining balance method of depreciation producesfinding the interest rate of an annuitycalculate payback period formulamaterial price variance formulacalculating the effective annual ratefreight charges that are paid by a buyer arethe dupont formuladefine debtorscalculate markup percentageaccounting journal entries practice problemsworking out gp percentagetrial balance for dummiesjournal entry to write off bad debtwhat is an unadjusted trial balanceexample of annuity due problemsnpv of an annuityaccounting closing entries exampleshistorical accounting conceptaccount payable and note payablecalculate receivable dayswithholding tax accounting entriesexample of cash voucherdeferred tax calculation worksheetexplanation of accounting equationtabel annuityannuity calculation excelcompany bookkeeping templatesunearned revenue income statementfixed asset turnover equationdisposal of fixed assets cash flow statementmethods of bank reconciliation statementshares accounting entriesadjusting entries affect the cash accountdebit credit balance sheet exceltax effect accounting journal entriesgrowing annuity future valuemarkup calculator percentagepresent value annuity calculationpresent value calculator excel templatepayback period accountingunfavorable labor rate variancefob shipment meansfob shipping point freight prepaiddays sales in receivables formulacontribution margin in dollarsloss on disposal of fixed assetswhat type of account is a suspense accountaccounting worksheet templatefixed assets ppenotes payable adjusting entryjournal entry for bank loan with intereststatement of retained earnings equationlabor rate variance formulaquick ratio accounting formulaperpetuity and annuitybookkeeper dictionarypaid creditor on account journal entrymarkup percentage calculationdebtor collection period definitionaccounting overheads