

Effective Annual Interest Rate 





An effective annual interest rate is used to determine the interest rate on an annual basis after accounting for the effects of compounding. A 10% annual rate compounded yearly would imply a 10% effective annual interest rate. A 10% annual rate compounded monthly would imply a 10.47% effective annual interest rate. The effective annual interest rate can be used to compare different nominal rates with different compounding schedules. For example, Bank A offers 14.75% compounded semiannually. Bank B offers 14.50% compounded monthly. To determine the better return on investment, the effective annual interest rate for both should be calculated, taking into account the different compounding schedules. The effective annual interest rate for Bank A is 15.29%, whereas the effective annual interest rate for Bank B is 15.50%. Therefore, the rate offered by Bank B provides a better return on investment.
Rate this effective annual interest rate definition...




Where is the market headed? The answer may surprise you. Find out with the exclusive & Barron's recommended charts of Chart of the Day. 

Popular Terms: inflation, stock split, required rate of return, 144a, option premium, VIX, class C shares, implied volatility, diluted share, average price per share, APR, risk management, deferred revenue, LIBOR, limit order, deferred tax, real GDP, exdividend, current ratio, annual return, minority interest, 1031 exchange, stock market close, FICO score, labor relations, per diem, retained earnings, quality assurance, exdividend date, FTSE, debt service coverage, liquidity ratio, 401a, command economy, dividends payable, Key Rate Duration, Zero Cost Collar, irrevocable trust, balance sheet, reverse mortgage, open position, 1035 exchange, phantom income, covered put, cancelled check, in escrow, EBITDA, whollyowned subsidiary, margin rate


 