Effective Annual Interest Rate
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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:
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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.
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By understanding the factors that influence interest rates, you can learn to anticipate their movement and profit from it.
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Get a deeper understanding of the importance of interest rates and what makes them change.
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Paying these rates can impact your disposable income and your investment returns.
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