Effective Interest

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.

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This table shows the effective interest rates for a list of nominal interest rates and compounding frequencies.

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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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