Effective Annual Interest Rate


What is '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


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BREAKING DOWN '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.

  1. Nominal Interest Rate

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  3. Fixed Interest Rate

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  4. Interest Rate Ceiling

    The maximum interest rate that a financial institution can charge ...
  5. Variable Interest Rate

    An interest rate on a loan or security that fluctuates over time, ...
  6. Compounding

    The ability of an asset to generate earnings, which are then ...
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