Calculating Effective Interest Rate

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Calculating Effective Interest Rate
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Calculating
Effective Interest
Rate
OpenOffice Powerpoint Calculating Effective Interest Rate Edit: PAZ=Paddon Development Email: paz4Tunnel@hotmail.ca

How to Calculate Effective Interest Rate
CalculationHelpCalculatingEffective Interest Rate

How to Calculate Effective Interest Rate
CalculationHelpCalculatingEffective InterestRatehttp://www.wikihow.com/Calculate-Effective-Interest-Rate
Edited by Carolyn Barratt, A_F_Bob_Blair_Jr, Maniac, Chris and 5 others

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.


Overview
Calculate The Effective Interest Rate
Using The Following Formulae.
➲1

Calculate-Effective-Interest-Rate-Step-1-Version-2
➲2 Calculate-Effective-Interest-Rate-Step-2-Version-2
➲- Effective Interest Rate Cheat Sheet
➲ Stated Interest Rate Conversion Cheat Sheet



The effective interest rate calculation does not take into account one-time
fees like loan origination fees. These fees are considered, however, in the
calculation of the annual percentage rate.

1 Familiarize yourself with the concept of the effective interest rate. The effective
interest rate attempts to describe the full cost of borrowing. It takes into account
the effect of compounding interest, which is left out of the nominal or "stated"
interest rate. For example, a loan with 10 percent interest
compounded monthly will actually carry an interest rate higher
than 10 percent, because more interest is accumulated each month.


2 Determine the stated interest rate and number of compounding periods for
the loan. These are the 2 important terms needed to calculate effective interest
rate. The stated (also called nominal) interest rate will be expressed as a
percentage. The compounding periods will generally be monthly,
quarterly, annually, or continuously. This refers to how often interest is applied.


3 Familiarize yourself with the formula for converting the stated interest rate to the
effective interest rate. 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 numberCalculating Effective Interest Rate Edit:periods per year.paz4Tunnel@hotmail.ca
of compounding PAZ=Paddon Development Email:


4 Calculate the effective interest rate using the formula above. For example,
consider a loan with a stated interest rate of 5 percent that is compounded
monthly. Using the formula yields: r = (1 + .05/12)^12 - 1, or r = 5.12 percent. The
same loan compounded daily would yield:
r = (1 + .05/365)^365 - 1, or r = 5.13 percent. Note that the
effective interest rate will always be greater than the stated rate.


5 Familiarize yourself with the formula used in case of continuously
compounding interest. If interest is compounded continuously, you should
calculate the effective interest rate using a different formula:
r = e^i - 1. In this formula, r is the effective interest rate, i is the
stated interest rate, and e is the constant 2.718.


6 Calculate the effective interest rate in case of continuously compounding
interest. For example, consider a loan with a nominal interest rate of 9 percent
compounded continuously. The formula above yields:
r = 2.718^.09 - 1, or 9.417 percent.

Effective Interest Rate Cheat Sheet

➲Strategy
➲Summary


http://www.wikihow.com/Sample/Effective-Interest-Rate-Diagram

Stated Interest Rate Conversion Cheat Sheet

➲Strategy
➲Summary
Edit: PAZ=Paddon Development
Email: paz4Tunnel@hotmail.ca


http://www.wikihow.com/Sample/Stated-Interest-Rate-Conversion-Diagram

Thank You

Calculating Effective
Interest Rate
Edit: PAZ=Paddon Development
Email: paz4Tunnel@hotmail.ca

Calculating Effective Interest Rate

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Calculating Effective Interest Rate