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5.2.1 EFFECTIVE RATE OF INTEREST
Instructions: Use the following tutorial to help
introduce or reinforce the concept of Effective Rate.
Read through the introduction, then study and familiarize
yourself with the definitions of terms. Next, use
the incremental calculator to study each step of
the process of determining Effective Rate. Finally,
use the calculator for examples to quiz yourself.
The effective rate of interest is
the simple interest rate that
produces the same accumulated amount in one
year as the nominal rate compounded
m times a year.
The following is the formula for comparing interest rates:
reff = (1 + r/m)m - 1
The Truth in Lending Act
passed by Congress in 1968 requires that the effective
rate of interest be disclosed in all contracts involving
interest charges.
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