What Is The Effective Rate Of Interest For 11% Annual Rate Compounded Yearly?
I am having trouble in this math class I am taking and just trying to get a better understanding of this interest rate stuff.
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asked 2 years ago
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In this case 11% is called as nominal interest rate. The effective rate is caluclated when the nominal rate is compounded, i.e, when the interest amount earned per period is added to the principle amount. So in the next period, the interest will be earned on Principle amount + the interest earned. If r = effective rate, i = nominal interest rate, and n= number of compounding periods, then we will use the folloing formula to calculate it
r = (1 + i/n)^n - 1
You have not mentioned the time period for this investment. If this interest (11%) is earned for 5 year, with yearly compounding, then the effective rate would be:
R = (1 + 11%/5)^5
r = 1
.1149% or approximatley r = 1.114%
r = (1 + i/n)^n - 1
You have not mentioned the time period for this investment. If this interest (11%) is earned for 5 year, with yearly compounding, then the effective rate would be:
R = (1 + 11%/5)^5
r = 1
.1149% or approximatley r = 1.114%
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