**Effective Interest Rate**

Contents

Effective Interest Rate (EIR) are use to compare securities and investments with different compounding cycle or life.

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**Effective Interest Rate when Annual Percentage Rate is given**

**Example 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**

**Example 2****:**

If you pay 1.5% per month EIR on the outstanding balance of your Master card bill, what APR are you being charged?

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