What is an equivalent interest rate?

An equivalent interest rate is the rate which achieves the same total proceeds as another given interest rate (the nominal rate ), but assuming a different frequency of compounding. An effective interest rate is an equivalent interest rate, where the frequency of compounding is annual (i.e. 365 days).

What is an effective interest rate?

The effective interest rate is the true annually compounded interest rate that is equivalent to an interest rate compounded at some other (non-annual) frequency.

What is the nominal annual interest rate and effective interest rate?

In this case, the nominal annual interest rate is 10%, and the effective annual interest rate is also 10%. However, if compounding is more frequent than once per year, then the effective interest rate will be greater than 10%. The more often compounding occurs, the higher the effective interest rate.

What is effective annual interest rate (AER)?

It is also called the effective interest rate, the effective rate, or the annual equivalent rate (AER) . The effective annual interest rate is the true interest rate on an investment or loan because it takes into account the effects of compounding. The more frequent the compounding periods, the higher the rate.