Effective Annual Interest Rate

AAA

DEFINITION of 'Effective Annual Interest Rate'

An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following:

 

Effective Annual Interest Rate

INVESTOPEDIA EXPLAINS 'Effective Annual Interest Rate'

Consider a stated annual rate of 10%. Compounded yearly, this rate will turn $1000 into $1100. However, if compounding occurs monthly, $1000 would grow to $1104.70 by the end of the year, rendering an effective annual interest rate of 10.47%. Basically the effective annual rate is the annual rate of interest that accounts for the effect of compounding.

VIDEO

Loading the player...
RELATED TERMS
  1. Nominal Interest Rate

    The interest rate before taking inflation into account. The equation ...
  2. Real Interest Rate

    An interest rate that has been adjusted to remove the effects ...
  3. Stated Annual Interest Rate

    The return on an investment that is expressed as a per-year percentage, ...
  4. Fixed Interest Rate

    An interest rate on a liability, such as a loan or mortgage, ...
  5. Dollar Bond Index-Linked Securities ...

    A zero-coupon floating rate debt instrument with an interest ...
  6. Compounding

    The ability of an asset to generate earnings, which are then ...
RELATED FAQS
  1. How does expansionary economic policy impact the stock market?

    Expansionary economic policy leads to increases in the stock market because it generates increased economic activity. Policymakers ... Read Full Answer >>
  2. What goods and services do command economies produce?

    A command economy is an economic system in which the government, or the central planner, determines what goods and services ... Read Full Answer >>
  3. What are the advantages of free trade over mercantilism?

    Free trade provides advantages over mercantilism for individuals, businesses and nations. A key advantage of free trade for ... Read Full Answer >>
  4. How can industrialization affect the national economy of less developed countries ...

    Industrialization – the period of transformation from an agricultural economy to an urban, mass-producing economy – has accompanied ... Read Full Answer >>
  5. What is the difference between consumer surplus and economic surplus?

    The consumer surplus is the difference between the highest price a consumer is willing to pay and the actual market price ... Read Full Answer >>
  6. What does it signify about a given product if the consumer surplus figure for that ...

    High consumer surplus for a particular product signifies a high level of utility for consumers and may carry some implications ... Read Full Answer >>
Related Articles
  1. Investing

    The Effective Annual Interest Rate

    The effective annual interest rate is a way of restating the annual interest rate so that it takes into account the effects of compounding.
  2. Economics

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  3. Retirement

    Understanding Credit Card Interest

    Paying these rates can impact your disposable income and your investment returns.
  4. Investing Basics

    Interest Rates And Your Bond Investments

    By understanding the factors that influence interest rates, you can learn to anticipate their movement and profit from it.
  5. Economics

    What is a Capital Account?

    Capital account is an economic term that refers to the net change in investment and asset ownership for a nation.
  6. Economics

    Understanding the Fisher Effect

    The Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate.
  7. Investing

    The Labor Market Recovery’s Missing Ingredient

    Job creation is running at the fastest pace since the 90s, and there is some evidence that wage growth is finally starting to accelerate, albeit modestly.
  8. Economics

    Gambling on Macau: Too Risky?

    Macau was once heralded as the new Las Vegas for casino investors. Is it too late?
  9. Economics

    When To Expect Fed Liftoff Now

    “When will the Fed raise interest rates?” That has been the question of many investors since the Fed indicated it was prepared to end its zero rate policy.
  10. Economics

    Why Is The Federal Reserve Independent?

    An overview of the independent status of the Federal Reserve and arguments for and against it.

You May Also Like

Hot Definitions
  1. Adverse Selection

    1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have ...
  2. Wash Trading

    The process of buying shares of a company through one broker while selling shares through a different broker. Wash trading ...
  3. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixed-income ...
  4. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  5. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  6. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
Trading Center