Question

If the annual interest rate is 5% that is compounded daily, monthly and yearly, what is the formula to calculate the effective interest after 3 years ?

Answer 1

Given

inerest rate(i) = 5%

No. of periods(n)= 3 Years

R=( 1+ i/n)^n -1

R = Effective Interest

i = Nominal interest rate

n = No. of periods

R=(1 + 0.05/3)^3 -1

R = 0.06 or 6%

Therefore by calculation effective interest rate after 3 year is 6%.