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| Annual Effective Interest Rate Formula: Annual Effective Interest Rate = (1 + interest rate/number of compounding periods )^number of compounding periods - 1 | |||
Annual Effective Interest Rate Definition The Annual Effective Interest Rate Calculator is a financial calculator will calculate the annual effective interest rate for any type of investment or savings product if you enter in the annual interest rate and the number of compounding periods. Converting from the annual interest rate to the annual effective interest rate is as simple as entering in the annual interest rate into the field and then clicking on the calculate button. Why is it important to be able to calculate the annual effective interest rate as opposed to just basing financial decisions purely off of the regular annual interest rate? The importance of the annual effective interest rate is due to the effect of interest compounding. When interest compounds more than once per year then you should rely on the annual effective interest rate as a more accurate picture of the true interest that is being earned instead of the regular annual interest rate. How to Calculate Annual Effective Interest Rate Let's be honest - sometimes the best annual effective interest rate calculator is the one that is easy to use and doesn't require us to even know what the annual effective interest rate formula is in the first place! But if you want to know the exact formula for calculating annual effective interest rate then please check out the "Formula" box above. |