It is the rate of interest at which mount of the principal grows with regards to the rate of compounding.
r = (1+K/m)m - 1
K = Nominal Rate of Interest
r = Effective Rate of Interest
m = Frequency of Compounding
A bank offers 8% nominal rate of interest with quarterly compounding.
What is the effective rate of interest ?
R = (1+.08/4)4 -1=1.082-1=.082 i.e 8.2%
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