Effective
Interest Rate on Investments  Calculation
1. Explanation of concepts and code in Matlab2. Examples 3. Video
4. Online Calculator (another page within this site)
1. Explanation of concepts and code in Matlab

This
code calculates the
effective interest rate for a known initial
investment
which amounts to a known future value in a specified period of time.
This rate
expresses the actual rate of interest earned annually on the investment.
The
effective interest rate is calculated by the following formula:

where:
T = future value
P = initial investment
Y = years
You may
calculate the effective interest rate on amounts you have already
invested and
accrued interest. Or you may calculate the effective interest rate
necessary to
enable a principal to reach a hypotetical value in a specified amount
of time.
For example, if you invest $5000 in a bank and wish $6800 after six
years,
you will predict the effective interest rate the bank must pay in order
to
achieve this.
The
effective rate may also be used to calculate the effective percent of
depreciation of an investment. A negative rate shows actual
depreciation.
This is
our simple Matlab code to calculate the formula above:
function eir =
effective_interest_rate(p, t, y)
eir =
((t/p)^(1/y)1)*100;
We create another script
to test and drive the above mfile:
clc;
clear; format bank
p =
input('Enter
initial investment: ');
t = input('Enter
total value after y years: ');
y =
input('Enter
number of years: ');
eir
=
effective_interest_rate(p, t, y)
Example
1:
Jane
deposits $945 in a bank. Four and a half years later her account has
$1309.79.
What actual percent of her initial investment did the bank pay annually?
Enter
initial investment: 945
Enter
total value after y years: 1309.79
Enter
number of years: 4.5
The
result is:
eir = 7.52
Example
2:
Richie
bought a car in 1990 for $7534.84 and sold it in 1993 for $3555.00.
What was
its effective rate of depreciation?
Enter
initial investment: 7534.84
Enter
total value after y years: 3555
Enter
number of years: 3
The
result is:
eir
= 22.15
3. Video on Interest Rates
From
'Effective Interest
Rate' to home
From
'Effective Interest Rate' to 'Finance Formulas'
