Topics › Effective/Nominal Rate Conversion
Effective/Nominal Rate Conversion
Converts a nominal annual rate with multiple interest credits per year into the effective annual rate.
Type values, assign them with the value keys and press "Solve". It is the same financial calculator as under "Calculator" in the menu above.
Examples for this calculator
Each example is a story with explanation and a "what you learn" takeaway.
Formula
i_eff = (1 + i_nom/m)^m − 1
How the formula works
i_eff = (1 + i_nom/m)ᵐ − 1 shows why more frequent interest credits bring more: each intra-year credit itself earns interest again. That is why the effective rate lies above the nominal rate – and only effective rates may be compared fairly.
Intra-year compounding raises the effective rate through compound interest.
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