EFFECTIVE INTEREST RATE WITH EXAMPLE

EFFECTIVE INTEREST RATE WITH EXAMPLE

EFFECTIVE INTEREST RATE:

The actual interest rate which is paid on our principal amount is called effective interest rate.

Formula:

EIR = (1 + i/m)^m – 1

m= ∞ =continuously

EIR = eⁱ - 1

Example:

i=9.6%     = 0.096
calculate, annualy,semiannyaly, quaterly, monthly, daily, continously

Annualy: m=1
EIR = (1 + i/m)^m – 1
EIR = (1 + 0.096/1)¹ – 1

=0.096  OR 9.6%

Semiannuly = m=2
EIR = (1 + i/m)^m – 1

EIR = (1 + 0.096/2)² – 1

=0.098 OR 9.8%

Quaterly = m =4
EIR = (1 + i/m)^m – 1

EIR = (1 + 0.096/4)⁴ – 1

=0.099 or 9.9%

Monthly = m= 12
EIR = (1 + i/m)^m – 1

EIR = (1 + 0.096/12)¹² – 1

=0.100 or 10%

Daily= m = 365
EIR = (1 + i/m)^m – 1

EIR = (1 + 0.096/365)³⁶⁵ – 1

=0.1007 or 10.07%


m= ∞ =continuously
EIR = eⁱ - 1

=(2.7182)^0.096 - 1

=0.1007  or 10.07%


FINANCIAL MANAGEMENT
DECISION AREA OF FINANCIAL MANAGEMENT
AGENCY PROBLEM
TYPES OF BUSINESS
FINANCIAL SYSTEM
FINANCIAL INTERMEDIARIES
TYPES OF FINANCIAL MARKETS
TIME VALUE OF MONEY
EXAMPLES AND FORMULA TIME VALUE OF MONEY
CASH FLOW,SUM,SERIES OF CASH, ANNUITY AND MIX STREAM
ANNUITY TYPES AND FORMULA
AMORTIZATION SCHEDULE OR TABLE WITH EXAMPLE
EFFECTIVE INTEREST RATE WITH EXAMPLE
VALUATION OF LONG TERM SECURITIES (BONDS)
TYPES OF BONDS
BONDS FORMULA,ZERO COUPON PERPETUAL
VALUATION OF LONG TERM SECURITIES (SHARE)
CASH AND MARKETABLE SECURITIES MANAGEMENT
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