What is the effective interest rate?

To calculate the Issuer’s effective interest rate (Y), we calculate the periodic interest rate based on the actual amount (PA) received. Theoretically, the formula to solve for the periodic interest rate i/m is below:

What is Effective Interest Rate

The illustration shown has to be solved by iteration, estimation or using a financial calculator. After solving for i/m, the effective interest rate Y of the borrower can be calculated as follows:

Y: effective interest rate

I: nominal yield rate

M: number of periods of compounding per year

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