Effective Interest Rate Calculator

Effective Interest Rate Calculator

This calculator is used to compute the effective period interest rate and the effective annual interest rate. It is simple to use and involves a step by step procedure of executing the calculations. It has three text fields where you have to select the options and enter the correct values. The first procedure is to enter the nominal annual interest rate in percentage. Choose the period in which it is to be compounded. It can either be days, weeks, months, quarters or others. If it is the others option, you will enter the compounding periods per year. Confirm that you have entered the correct values before clicking on the Calculate’ button. The results will be displayed in the bottom platforms of the calculator

Using this calculator, you can determine the effective period interest rate per day and effective annual interest rate per year. It also has the ‘Clear’ button which is used to erase all data of the previous calculations. It is useful in resetting the calculator any time you need to perform new calculations. The effective interest rate calculator only computes single values at once. You can always coordinate the ‘Calculate’ and ‘Clear’ button if you have more values that need to be calculated.

For example;

If the nominal annual interest rate is 8% per year and is compounded monthly, find the effective period interest rate per day and effective annual interest rate per year.

Solution

You will first enter the nominal annual interest rate and select the compounding period as monthly. Click on the ‘Calculate’ button to give you the results.

They will be displayed as;

Effective period interest rate = 0.667% per day

Effective annual interest rate = 8.300% per year

The calculator uses particular formulas in performing the calculations.

Effective Period Rate = Nominal Annual Rate / n, where the effective period interest rate is computed by dividing the nominal annual rate by the number of periods per year.

Effective Rate = (1 + Nominal Rate / n) n- 1, which means that the effective interest rate is calculated by; dividing the nominal interest rate in percentage by the number of compounding periods per year plus one. It is then raided to the power of n minus 1