Effective Interest Rate
Previous Lesson: Present Value of Perpetuity
Next Lesson: Rule of 72
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
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
If you pay 1.5% per month EIR on the outstanding balance of your Master card bill, what APR are you being charged?
Financial Management: Theory and Practice, Dr Eugene F Brigham & C Micheal Ehrhardt
Fundamentals of Financial Management: Concise Edition, Brigham Houston
The Economist Guide to Financial Management, John Tennet
Financial Management: Core Concepts, Raymond M Brooks