Effective Interest Rate
Effective Interest Rate (EIR) are use to compare securities and investments with different compounding cycle or life.
Effective Interest Rate when Annual Percentage Rate is given
Illustration 1: You decide to borrow Rs. 30,000 to buy a stereo system and a CD. Lending rates of three major banks are:
MCB Bank 8% p.a. compounded quarterly
National Bank 8% p.a. compounded semi-annually
Allied Bank 8% p.a. with daily compounding
You will go to a bank with lowest lending cost. To which bank would you go?
Annual Percentage Rate when Effective Interest Rate is given
Illustration 2: If you pay 1.5% per month EIR on the outstanding balance of your Master card bill, what APR are you being charged?