What is the yearly effective rate of interest?



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A bank charges 8.5% p.a. interest on loan on a monthly reducing balance basis. What is the yearly effective rate of interest?

How should we calculate?

2 Answer(s)


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((1 + (annualized interest rate/frequency))^ frequency - 1) x100

For the above question -
((1+(0.085/12))^12-1)*100 = 8.9%

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Hi. You can do the above calculation with in-built function "EFFECT" in Excel. Put the Nominal rate = 8.5% and Npery = 12 as one year has 12 months i.e. 12 times compounding in one year.
However, remembering the formula is a nice thing to do.

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