1. What is Effective Interest Rate?

The Effective Interest Rate (EIR) is the actual interest rate that an investor earns or a borrower pays after accounting for compounding over a given period. In Canada, this is particularly important for comparing different financial products with varying compounding frequencies.

2. How Does the Calculator Work?

The calculator uses the EIR formula:

Where:

• \( i \) — Nominal interest rate (in decimal form)
• \( n \) — Number of compounding periods per year

Explanation: The formula shows how compounding frequency affects the actual interest earned or paid.

3. Importance of EIR Calculation

Details: Understanding EIR is crucial for comparing loans, savings accounts, and investments in Canada, as different institutions may compound interest at different frequencies (daily, monthly, quarterly, etc.).

4. Using the Calculator

Tips: Enter the nominal rate as a decimal (e.g., 5% = 0.05) and the number of compounding periods per year. All values must be valid (rate > 0, periods ≥ 1).

5. Frequently Asked Questions (FAQ)

Q1: Why is EIR higher than the nominal rate?
A: Because of compounding - interest earns interest, so the more frequent the compounding, the higher the effective rate.

Q2: How does this apply to Canadian mortgages?
A: Canadian mortgages typically compound semi-annually, making the EIR different from the stated rate.

Q3: What's the difference between APR and EIR?
A: APR includes fees while EIR focuses purely on the compounding effect of the interest rate.

Q4: How does continuous compounding work?
A: As n approaches infinity, the formula becomes e^i - 1 (where e is Euler's number).

Q5: Is EIR the same across all Canadian provinces?
A: The calculation method is the same, but regulations about rate disclosure may vary by province.