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).

How to find equivalent interest rates in Excel?

The term “equivalent rates” carries with it the same concept as “effective rates” but takes into account interest rates that are compounded more than once per year. Note that “effective rates” refer to interest rates that are compounded annually. To use Excel to find equivalent interest rates we can use the EFFECT and NOMINAL functions

How do you calculate effective interest rate?

To calculate the effective interest rate, you must convert the compounding on the nominal interest rate into an annual compound. To see how the formula develops, take a $1,000 investment at 10% compounded semi-annually through a full year. Start with , and (semi-annually). Therefore, .

What is the equivalent interest rate considering the new compounding frequency?

The equivalent interest rate considering the new compouding frequency is 4.5424% Initial compounding frequency info: ■Nominal interest rate: 4.5000% ■Effective interest rate: 4.5940% ■Interest rate per period (considering m freq.): 0.3750%