Effective Periodic Rate
Effective Periodic Rate
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Now we know that EAR is the real interest rate per year. What if we want to know the real interest rate per month? Per day? Per 100 days? Is there a way we can convert real interest rate freely across different periods?
Yes, there is. The real interest rate per period, or Effective Periodic Rate, can be easily approached once we know the EAR.
As usual, let's do it through an example.
Learning by Example: Effective Periodic Rate and EAR
Learning by Example: Effective Periodic Rate and EAR
Following the example from last section, if the EAR is 69%, what is the real interest rate (or EPR) per month? per 100 days?
The formula of real interest rate per period given EAR is as below:
Here n is the number of real periods per year. For a month, there are 12 month per year, so it is 12; for 100 days, it is 365/100, which equals to 3.65.
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