**Effective Annual Rate is used to find out the actual annual rate that would be paid on a loan if the specified annual rate is affected by compounding.**

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### Calculator of Effective Annual Yield Rate

### Formula of Effective Annual Yield Rate

** i = [1 + (r/n)] ^{n} – 1 **

**Where, **

- r = Nominal Annual Interest Rate
- n = Number of payments per year
- i = Effective Interest Rate

### Example of Effective Annual Yield Rate

Annual interest rate of a firm is 10% compounded monthly payments, then what is the effective interest rate of the firm?

**Given,**

Nominal Annual Interest Rate (r) = 10% = 0.1 Number of payments per year (n) = 12

**To Find,**

Effective Interest Rate

**Solution**

Effective Interest Rate (i) = [1 + (r/n)]^{n} – 1

= [1 + (0.1/12)]^{12} – 1

= [1 + 0.008333]^{12} – 1

= 1.104713063 – 1

= 0.104713063 x 100

= 10.4713 %

**Result**

Effective Annual Interest Rate is 10.4713 %

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