# 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

 Nominal Annual Interest Rate (r) = % Number of payments per year (n) = Effective Interest Rate (i) = %

### 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 %