What is effective yield - Definition and Meaning
Effective Yield :
Effective Annual Rate is used to find out the actual annual rate that would be paid on a loan if the specified annual rate is affected by compounding.
i = [1 + (r/n)]n - 1
r = Nominal Annual Interest Rate
n = Number of payments per year
i = Effective Interest Rate
Annual interest rate is 10% compounded monthly payments,
what is the effective interest rate?
Effective Interest Rate (i) = [1 + (r/n)]n - 1
= [1 + (0.1/12)]12 - 1
= [1 + 0.008333]12 - 1
= 1.104713063 - 1
= 0.104713063 x 100
Effective Interest Rate (i) = 10.4713 %
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