Effective interest rate

src: i.ytimg.com

effective interest rate (EIR) , effective annual interest rate , annual equivalent rate ( AER ) or sufficient effective rate is the interest rate on the loan or financial product which is restated from the nominal interest rate as the annual compound interest rate paid in arrears.

This is used to compare the annual rates between loans with different compounding periods such as weeks, months, years, etc. The effective interest rate differs in one important matter from the annual percentage rate (APR): the APR method changes this weekly or monthly interest rate into what is called an annual rate that does not take into account the compounding effect. Ã,

In contrast, in the EIR, the periodic rate is annualized using compounding. This is the standard in the EU and a large number of countries around the world.

The EIR is more precisely in terms of finance, taking into account the compounding effect, ie the fact that for each period, interest is not calculated on the principal, but in the amount of the previous period, including capital and interest. This reason is easy to understand when looking at savings: interest is capitalized every month, and every month savers earn interest on interest from previous periods. As the effect of compounding, the interest earned during the year represents 26.82% of the initial amount instead of 24%, the 2% monthly interest rate is only multiplied by 12. If we consider non-saving loans, the compound interest rate reflects the opportunity cost for the borrower not to can invest the interest he paid to the lender into an asset that generates the same percentage of return.

The term nominal EIR or nominal APR may be used to refer to an annual rate that does not take into account future costs and other costs may be included.

Annual result percentage or effective annual result is analogous concept used for savings or investment product, such as certificate of deposit. Since any loan is an investment product for a lender, the requirement may be used to apply to the same transaction, depending on the point of view.

Effective annual interest or yield can be calculated or applied differently depending on circumstances, and definitions must be carefully studied. For example, a bank may refer to the proceeds on the loan portfolio after the expected loss as an effective result and includes income from other expenses, which means that the interest paid by each borrower may differ substantially from the effective outcome of the bank.

Video Effective interest rate

Calculation

Effective interest rate is calculated if it is compounded annually. The effective rate is calculated in the following way, where r is the effective annual rate, the nominal rate and n 12 for monthly compounding):

$Â\; ÂÂ\; Â\; Â\; ÂÂ\; Â\; Â\; Â\; Â{\displaystyle Â\; Â\; Â\; Â\; Â\; Â\; Â\; ÂrÂ\; Â\; Â\; Â\; Â\; Â\; Â\; Â\text{Ã,}Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â=Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\text{Ã,}Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â{()\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; ÂÂ\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â1Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; ÂÂ\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; ÂÂ\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\frac{\mathrm{me}}{n}Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; ÂÂ\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; ÂÂ\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â)Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â}^{Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; ÂnÂ\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â}Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â-Â\; Â\; Â\; Â\; Â\; Â\; Â\; Â1Â\; Â\; Â\; Â\; Â\; Â}Â\; Â\; Â\; ÂAnnotation\; encoding\; =\; "application/x-tex">\; \{\backslash \; displaystyle\; r\; \backslash \; =\; \backslash \backslash \; left\; (1\; \{\backslash \; frac\; \{i\}\; \{n\}\}\; \backslash \; right)\; ^\; \{n\}\; -1\}\; Â\; Â$

For example, the 6% monthly combined interest rate is equal to the effective interest rate of 6.17%. 6% combined monthly is credited as 6%/12 = 0.005 each month. After one year, the initial capital increases by a factor (1 0.005) ¹² ? 1.0617.

Ketika frekuensi penggabungan meningkat hingga tak terbatas, perhitungannya adalah:

${\ displaystyle r \ = \ e ^ {i} -1}  ÂÂ$

The result depends on the frequency of the merge:

The effective interest rate is a special case of internal rate of return.

Jika tingkat bunga bulanan j diketahui dan tetap konstan sepanjang tahun, tarif tahunan efektif dapat dihitung sebagai berikut:

${\ displaystyle r \ = \ (1 j) ^ {12} -1}  ÂÂ$

The annual percentage rate (APR) is calculated in the following way, where I am the interest rate for the period and n is the number of periods.

APR = i x n

Maps Effective interest rate

Suku bunga efektif (akuntansi)

In accounting, the effective interest rate is used to describe the rate used to calculate interest or income expense based on the effective interest method. This is not the same as the effective annual rate, and is usually expressed as the level of APR.

src: wikihow.com

See also

• Real interest rate
• Real versus nominal (economic) value
• For coupon-free bonds such as US treasury bills, the effective annual discount rate can be set in lieu of effective interest rates, because the coupon coupon is zero at a discount of its face value.

src: i.ytimg.com

Note

src: slideplayer.com

References

• "Interest Rate: An Introduction", webpage: NYFed.

src: i.ytimg.com

External links

• http://www.miniwebtool.com/effective-interest-rate-calculator/Online Effective Interest Rate Calculator
• http://www.mftransparency.org/resources/microfinance-traps-handbook/Microfinance Pricing Handbook of Supervision

Source of the article : Wikipedia