Effective Interest Rate Formula
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.
What Is Effective Interest Rate Formula?
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,
r = (1 + i/n)^{n}1
where,
 r = The effective interest rate
 i = The stated interest rate
 n = The number of compounding periods per year
Let us see the applications of the effective interest rate formula in the following solved examples.

Example 1: A loan document contains a stated interest rate of 10% and mandates quarterly compounding. Find Effective Interest Rate on a loan document.
Solution:
To find: Current(I) flowing in the circuit.
Given:
The interest rate = 10%
The number of compounding periods per year = 4
Using effective interest rate formula,
r = (1 + i/n)^{n}1
=(1 + 10%/4)^{4}1
=(1 + 0.10/4)^{4}1
= 10.38%
Answer: Effective interest rate on a loan document is 10.38%.

Example 2: What is the effective interest rate for a nominal annual interest rate of 12% compounded monthly?
Solution:
To find: Current(I) flowing in the circuit.
Given:
The interest rate = 12%
The number of compounding periods per year = 12
Using the effective interest rate Formula,
r = (1 + i/n)^{n}1
=(1 + 12%/12)^{4}1
=(1 + 0.12/12)^{4}1
= 4.06%
Answer: Effective interest ate 4.06%.
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