In case of the mutual fund, the number of compounding periods per year is 1, while in the case of P2P lending, it is monthly compounding, hence there are 12 compounding periods.Įffective Annual Returns = – 1 However, the effective annual rate is calculated by taking the nominal annual rate of interest and compounding it for the number of specified periods (12 if compounding is monthly 6 if compounding is bi-monthly 4 if it is quarterly and 2 if it is semi-annual) applicable in a time span of one year. So calculate the effective annual rate for both the cases. Let us assume that mutual fund investment fetches 15.50% annual interest rate as earnings, while P2P Lending earns 15% annual nominal rate of interest, compounded monthly. Calculate the Effective Annual Rate.Įffective Annual Rate Formula – Example #3 A invested $100 in a certificate of deposit that pays out a nominal annual interest rate of 10% compounded on a quarterly basis.
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