Posts Tagged ‘Effective Rate’

Effective Rate

Effective Rate

The effective rate corresponding to a stated rate of interest r compounded m times per years is

re  =   (1 + \frac{r}{m})^{m} - 1.

Example:-

A bank pays interest of 4.9% compounded monthly. Find the effective rate.

Solution:-

Use the formula given above with r = .049 and m = 12. The effective rate is

re   =   (1 + \frac{.049}{12})^{12} - 1.

= .050115577 = 5.01 %