Define: Effective Annual Interest Rate

UK Accounting Glossary

Definition: Effective Annual Interest Rate



Advertisement



Full Definition of Effective Annual Interest Rate


An effective annual interest rate is used to determine the interest rate on an annual basis after accounting for the effects of compounding. A 10% annual rate compounded yearly would imply a 10% effective annual interest rate. A 10% annual rate compounded monthly would imply a 10.47% effective annual interest rate. The effective annual interest rate can be used to compare different nominal rates with different compounding schedules. For example, Bank A offers 14.75% compounded semiannually. Bank B offers 14.50% compounded monthly. To determine the better return on investment, the effective annual interest rate for both should be calculated, taking into account the different compounding schedules. The effective annual interest rate for Bank A is 15.29%, whereas the effective annual interest rate for Bank B is 15.50%. Therefore, the rate offered by Bank B provides a better return on investment.


Advertisement




Cite Term


To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.

Page URL
https://payrollheaven.com/define/effective-annual-interest-rate/
Modern Language Association (MLA):
Effective Annual Interest Rate. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. February 29, 2020 https://payrollheaven.com/define/effective-annual-interest-rate/.
Chicago Manual of Style (CMS):
Effective Annual Interest Rate. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. https://payrollheaven.com/define/effective-annual-interest-rate/ (accessed: February 29, 2020).
American Psychological Association (APA):
Effective Annual Interest Rate. PayrollHeaven.com. Retrieved February 29, 2020, from PayrollHeaven.com website: https://payrollheaven.com/define/effective-annual-interest-rate/

Definition Sources


Definitions for Effective Annual Interest Rate are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • BusinessDictionary.com
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 9th February 2020.