Effective annual interest rate
An annual measure of the time value of money that fully reflects the effects of compounding.
Effective Annual Interest Rate
What Does Effective Annual Interest Rate Mean?
The annual rate of interest of an investment when compounding occurs more often than once a year. It is calculated as follows:
Investopedia explains Effective Annual Interest Rate
Consider a stated annual rate of 10%. Compounded yearly, this rate will turn $1,000 into $1,100. However, if compounding occurs monthly, $1,000 will grow to $1,104.70 by the end of the year, for an effective annual interest rate of 10.47%. Basically, the effective annual rate is the annual rate of interest that accounts for compounding.
Related Terms:
• Annual Percentage Yield
• Compounding
• Coupon
• Fixed-Income Security
• Interest Rate
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