How to Calculate the Effective Annual Rate

by Carter McBride ; Updated September 11, 2015
Calculating Effective Annual Rate

Effective annual rate is the rate of interest taken into account compounding over the year. For example, a bank offers 2 percent interest each month. The bank account is making over 2 percent over the course of a year due to compounding. By finding the effective annual rate of more than one investment, an investor may apply his money to the investment with the highest return.

Divide the annual interest rate by the number of periods compounding, then add one to the answer. In the example, 2 percent divided by 12 months, equals 0.001667, plus 1, which equals 1.001667.

Raise the number calculated in Step 1 to the power of the number of periods compounding. In the example, 1.001667 ^ 12, which equals 1.020814.

Subtract 1 from the number calculated in Step 2. In the example, 1 minus 1.020814 equals 0.020814.

Multiply the number calculated in Step 3 by 100 percent. In the example, 0.020814 times 100 percent equals an effective annual rate of 2.0814 percent.

References

About the Author

Carter McBride started writing in 2007 with CMBA's IP section. He has written for Bureau of National Affairs, Inc and various websites. He received a CALI Award for The Actual Impact of MasterCard's Initial Public Offering in 2008. McBride is an attorney with a Juris Doctor from Case Western Reserve University and a Master of Science in accounting from the University of Connecticut.

Photo Credits

  • calculator image by Szymon Apanowicz from
Cite this Article | raiffeisen-cards.ru A tool to create a citation to reference this article Cite this Article

Related pages


what can you spend pell grant money onland improvement depreciationdoes full coverage auto insurance cover theftform 13844how to check if you are in chexsystemsrequirements for gastric bypassboscov's credit cardminnesota renting lawsva benefits for 100 disabilitycash flow statement definecease and desist creditorquit claim deed vs warranty deedscad scholarships portfoliodoes insurance cover foundation repairae flood zone designationcalculating ending retained earningssep ira contribution limitcredit card designs bank of americaare insurance deductibles tax deductiblevanilla visa gift card customer servicesalary of a game wardenhow to calculate dividends per sharecan you buy beer with ebtannualised yield calculatordialysis cost per yearveterans survivor benefits guidebudget narrative for grant proposalcapital gains tax for inherited propertywhen do you receive your pell grant moneyhow much do you get for selling plasmahow to apply for ebt card in californiaesa taxablehow to calculate arrearskaiser member services phonebanking rules on cash depositshow to figure out tax deduction from paycheckwho pays gift tax giver or recipientapply for va loan certificate of eligibilityplasma donation qualificationslist of banks that cash savings bondssalary request letterrevocable living trust template freecpr certification expirationwhat happens if you leave a bank account overdrawndeduct sales tax on new carsimplified method worksheetdeferred call provisionirs tax topic 152how to calculate estimated tax penaltysmione card balancedoes goodwill take used bookswhat can a repo man do and not dojob offer letter of intentbuying a house below appraised valuesalutation for cover letternose job cost canadafha gift of equitysimple ira withdrawal rulesmileage log for irschapter 13 wage earner planhow to file taxes without w2flat tax system pros and consw4 form wikiirs form 8812 worksheetwhat is ach withdrawaleffects of the stock market crashbuy gold bars from banksafest retirement investmentcigna predetermination formflexible budget advantages and disadvantagescredit score tiershow to buy at a foreclosure auction

Related pages


what can you spend pell grant money onland improvement depreciationdoes full coverage auto insurance cover theftform 13844how to check if you are in chexsystemsrequirements for gastric bypassboscov's credit cardminnesota renting lawsva benefits for 100 disabilitycash flow statement definecease and desist creditorquit claim deed vs warranty deedscad scholarships portfoliodoes insurance cover foundation repairae flood zone designationcalculating ending retained earningssep ira contribution limitcredit card designs bank of americaare insurance deductibles tax deductiblevanilla visa gift card customer servicesalary of a game wardenhow to calculate dividends per sharecan you buy beer with ebtannualised yield calculatordialysis cost per yearveterans survivor benefits guidebudget narrative for grant proposalcapital gains tax for inherited propertywhen do you receive your pell grant moneyhow much do you get for selling plasmahow to apply for ebt card in californiaesa taxablehow to calculate arrearskaiser member services phonebanking rules on cash depositshow to figure out tax deduction from paycheckwho pays gift tax giver or recipientapply for va loan certificate of eligibilityplasma donation qualificationslist of banks that cash savings bondssalary request letterrevocable living trust template freecpr certification expirationwhat happens if you leave a bank account overdrawndeduct sales tax on new carsimplified method worksheetdeferred call provisionirs tax topic 152how to calculate estimated tax penaltysmione card balancedoes goodwill take used bookswhat can a repo man do and not dojob offer letter of intentbuying a house below appraised valuesalutation for cover letternose job cost canadafha gift of equitysimple ira withdrawal rulesmileage log for irschapter 13 wage earner planhow to file taxes without w2flat tax system pros and consw4 form wikiirs form 8812 worksheetwhat is ach withdrawaleffects of the stock market crashbuy gold bars from banksafest retirement investmentcigna predetermination formflexible budget advantages and disadvantagescredit score tiershow to buy at a foreclosure auction
"].join(""));l.close()}catch(m){b.src=a+'d.write("'+loaderHtml().replace(/"/g,String.fromCharCode(92)+'"')+'");d.close();'}b.contentWindow.config=k;b.contentWindow.SCRIPT_ID=g},0)}}}(); window.usabilla.load("w.usabilla.com", "4a73c8c43a12"); /*]]>{/literal}*/