Effective Annual Interest Rate

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Definition: Effective Annual Interest Rate

It is     Total Interest expense for the year

                    Total outstanding liabilities

Where compounding occurs more than once in a year, then the effective annual interest rate is denoted as:

(1+i/n)n – 1

Here n= number of periods of compounding

        i= nominal interest rate given

All the interest rates are annualized such that there is common comparison among the securities.


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