Also known as Annual Effective Rate (AER), Equivalent Annual Rate (EAR), Effective Annual Yield.
An effective interest rate is an interest rate that has a compounding frequency of one year.
This is the annual interest rate that is actually received taking compounding into consideration.
An effective interest rate is quoted as a percentage.
Excel Worksheet Function
EFFECT - This function returns the effective (or annual) interest rate given a nominal interest rate.
This table shows the effective interest rates for a list of nominal interest rates and compounding frequencies.
Comparing Effective Interest Rates
Effective interest rates can be easily compared.
If you have two interest rates with different compounding frequencies, they can be easily converted to effective interest rates.
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