Effective Rate of Interest Calculation

Effective Rate of Interest Calculation

effective rate of interest calculationSee Also:
What is Compound Interest
When is Interest Rate Not an Important in Selecting a Loan?
Nominal Interest Rate
Interest Rate Swaps
Fixed Interest Rate vs Floating Interest Rate

Effective Rate of Interest Calculation

An effective rate of interest calculation is the actual cost of a loan. It is the total amount of interest paid on a loan, expressed as a percentage of the principal. Effective annual interest rates incorporate the effects of compounding.

Effective Annual Rate Formula

Effective annual interest rates are calculated in the two following ways:
1. Effective Rate = Total Interest Paid / Principal Amount
2. Effective Rate = (1 + i / n)n – 1
(Where i is the nominal rate and n is the number of compounding periods per year.)
For example, using the first formula, if the starting principal amount is $1,000 and the total interest paid over the course of the year is $104.70, then the effective interest rate is 10.47%. So, look at the following calculation:
.1047 = 104.7 / 1000
Using the second formula, if the starting principal amount is $1,000, the nominal annual interest rate is 10%, and the rate is compounded monthly, then the effective annual rate is 10.47%. Look at the following calculation:
.1047 = (1 + .10/12)12 – 1
If you want to overcome obstacles and prepare how your company is going to react to external factors, then download your free External Analysis whitepaper.
effective rate of interest calculation
ebitda formula, EBITDA ratio analysis
 

ARTICLES YOU MIGHT LIKE

The Struggles of Private Company Accounting

Hiring the right accountant  When I meet a business owner operating at a successful $10 million in revenue, they often mention, “My CPA”… I immediately know that CEO/Entrepreneur is referring to their Tax CPA.  That is because one thing that all Entrepreneurs have in common is that they must file a tax return.  So, from

Read More »

IN CRISIS? GET A STRATEGIC CFO! – CEO Blindspots Podcast

Friend of the firm, Birgit Kamps, recently had Strategic CFO President, Dan Corredor, as a guest on her podcast, CEO Blindspots. CEO BLINDSPOTS HOST: Birgit Kamps. She was speaking five languages by the age of 10, and lived in five countries with her Dutch parents prior to becoming an American citizen. Birgit’s professional experience includes starting

Read More »

SHRM calls ICHRA the 401K for Group Health Benefits

Fed-up with group health insurance? ICHRA is the new way to offer great health benefits and avoid ACA penalties, SHRM calls it the 401K for group health benefits.  In 2020 the Department of Labor, HHS and IRS changed the rules for employer health benefits. They changed the Affordable Care Act mandates and penalties for every

Read More »

JOIN OUR NEXT SERIES

Financial Leadership Workshop

MARCH 28TH-31ST 2022

SHARE THIS ARTICLE

JOIN THE NEXT STRATEGIC CFO™ SERIES

Strategic CFO™ Financial Leadership Workshop
The Art of the CFO®

Days
Hours
Min
Sec

September 12-15th 2022