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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Confused about the formula of Effective interest rate.

- This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.

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- November 28, 2021 at 2:58 pm #641904
Hi John, hope you are doing well.

Is the formula of effective interest (1+i)^n – 1 or (1+i/n)^n – 1?

I have seen both of them being used in different places.Thank you.

November 28, 2021 at 6:18 pm #641938The first formula is when we are given the period interest rate (for example, the interest every three months). The second formula is where the yearly interest rate is given (so for example, the 3 month interest rate is the yearly interest rate divided by 4 because there are 4 periods of 3 months in a year.)

However it is dangerous to simply learn formula. It is more important to understand what is happening. Have you watched my lectures on this?

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