

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


 