Talk:Effective interest rate

Question
how do you calculate a firm's effective interest rate using financial statements?

Problem with the formula
Putting 6 into the formula gives the wrong answer. It's not clear that you have to put in 0.06, ie the percentage as a proper number.


 * Clarified.--Gregalton 15:17, 2 June 2007 (UTC)

Problem with i as a symbol
I would change the symbol i in the formula $$r = e^i - 1$$. Strictly speaking $$e^i = \cos(1) + i \sin(1)$$

equation for calculating effective interest rate
I think the equation used to calculate the effective interest rate is incorrect. My understanding of the relation between effective (i) and nominal (r) interest rate is e^r=(1+(i/n))^n. I see 1+(i/n) as the base b such that e^r=b^n. This is important because it allows any discrete calculation of interest in terms of (i) to be expressed as a continuous calculation in terms of base e and nominal interest rate (r). If we know n and r we can solve for i (the effective rate). I think this equation correctly shows the relation between effective and nominal interest rate discussed in the article.

Also I propose switching the current terminology of the equation such that i changes to r and r changes to i. (This suggestion is reflected in my equations above.) This switch would improve the second equation in the article from r=e^i -1 to i = e^r -1. This switch would not only address a comment stated in a previous concern but also be more consistent with the convention of letting the exponent of e be r as in V=Ae^(rt) aka the time value of money equation.

--Scooke59 21:46, 15 November 2007 (UTC)

As far as I'm aware, the usual convention is that r is the effective rate and i the nominal rate (the article should be edited to make this clear, though).

As far as I see it, you have two proposals:
 * 1) To change the first equation so that it uses continuous compounding. I personally think using discrete (once-annual) is the more intuitive way for most, but the article could include both. (While I prefer continuous compounding, it's a pretty obscure topic for non-specialists, and most would understand that 10% interest on $100 is $10). It also is the way usually used in, for example, excel and other public materials. (See the function details for Excel).
 * 2) Again, the usual formulation I have seen is that r is annual (discrete or compounded), i is periodic/nominal. If you have other references that show that (i.e. my memory is faulty, which is frequent), fair enough. As for the time value of money equation, it can be done discrete or continuous, but most people are not fluent with continuous compounding.--Gregalton (talk) 16:43, 20 November 2007 (UTC)

Effective interest rate, APR and APY
What is the relationship between effective interest rate, annual percentage rate and annual percentage yield? Finnancier (talk) 11:48, 23 August 2008 (UTC)

what's with the "444" ending the accountancy section?


 * fixed. Sargdub (talk) 05:14, 28 August 2017 (UTC)