Effective Annual Yield Rate
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.
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 %