Effective rate of Interest is the percentage at which amount of the investment grows with regards to the rate of compounding.

The effective rate of interest can be calculated using the following formula

r = [(1+k/m)^m] - 1

Where,

r = Effective Rate of Interest

k = Nominal Rate of Interest

m = Frequency of Compounding

For example

A money lender offers 8% nominal rate of interest with quarterly compounding.

Then the effective rate of interest will be

R = [(1+.08/4)^4] -1 = 1.082-1 = 0.082 or 8.2%

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