Definition:Effective Rate of Interest

Definition

Let $I$ be an interest rate calculated over time period of less than a year.

The effective rate is the yearly interest rate that would give the same interest as the compound interest calculated at the nominal rate over the specified conversion periods.

Examples

Arbitrary Example

Let $\pounds 1000$ be invested for $2$ years at $8 \%$ per annum.

Let interest be compounded half-yearly.

The effective rate of interest is $8 \cdotp 16 \%$ per annum.

Also see

• Results about effective rates of interest can be found here.

Sources

• 1998: David Nelson: The Penguin Dictionary of Mathematics (2nd ed.) ... (previous) ... (next): interest
• 2008: David Nelson: The Penguin Dictionary of Mathematics (4th ed.) ... (previous) ... (next): interest