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What is the effective annual interest rate?

帮考网校2020-11-30 14:16:45
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The effective annual interest rate is the actual interest rate that is earned or paid on an investment or loan, taking into account the effect of compounding over a year. It is expressed as a percentage and is calculated by using the formula:

Effective annual interest rate = (1 + (nominal interest rate / number of compounding periods)) ^ number of compounding periods - 1

For example, if the nominal interest rate is 6% and the interest is compounded monthly, the effective annual interest rate would be:

(1 + (0.06 / 12)) ^ 12 - 1 = 6.17%

This means that the investment or loan will earn or cost 6.17% per year, taking into account the effect of compounding.
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