Before going to learn the effective interest rate formula, let us recall what is the effective interest rate. The effective interest rate is the usage rate that a borrower actually pays on a loan, credit card, or any other debt amount also the effective interest rate is the real interest return on a savings account when the effects of compounding over time are taken into account. It can also be considered the market rate of interest or the yield to maturity. It is also called the effective rate, or the annual equivalent rate. Let us learn the effective interest rate formula along with a few solved examples.
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The effective interest rate is the overall interest rate that an investor (or borrower) can get (or pay) in a year after the compounding is considered. Effective interest rate formula can be expressed as,