Effective Interest Rate §

We ”standardise” the period so that we can calculate a percentage value that the interest will increase by in a specified term, we can then use that on the principal to get a value do not have to do this sequence manually, can use finance app on classpad.

The nominal rate of x% when compounded monthly is equivalent to an interest rate of y% when compounded annually.

Where; APR = Annual Percentage Rate also called nominal interest rate, its just the amount the bank charges (e.g. 8% p.a.)

Example §

To find effective interest rate use the financial app on the calculator and fill in everything you do know. (Effective annual interest rate questions page. 78)

What the Effective Interest Rate Means §

Over a year the interest will increase by % over a year