Definition for : Annual effective interest rate

When interest is paid more frequently than once a year, the annual effective Interest rate is used to evaluate the real Cost of the resource on an annual basis. To pass from the nominal Interest rate to the annual effective Interest rate, the following formula is used: (1 + t) = (1 + ka/n)n, where t is the annual effective Interest rate, n is the number of interest payments in the year and ka/n the Proportional rate during one period, or t = (1 + ka/n)n – 1.

(See Chapter 17 The internal rate of return of the Vernimmen)

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