Home
Back
EIR Approximation Formula:
| From: | To: |
The effective interest rate (EIR) approximation formula estimates the effective rate from simple interest, providing a close approximation particularly useful for low interest rates. It accounts for the compounding effect in a simplified manner.
The calculator uses the EIR approximation formula:
Where:
Explanation: This formula provides an approximation of the effective interest rate by considering the time value of money and the compounding effect, particularly accurate for lower interest rates.
Details: Calculating the effective interest rate is crucial for comparing different financial products, understanding the true cost of borrowing, and making informed investment decisions.
Tips: Enter the simple interest rate as a decimal (e.g., 0.05 for 5%), and the time period in years. Both values must be valid (rate ≥ 0, time > 0).
Q1: Why use this approximation instead of exact compounding formulas?
A: This approximation is simpler and provides sufficiently accurate results for low interest rates, making it practical for quick calculations.
Q2: What are typical EIR values?
A: EIR values vary widely depending on the simple rate and time period, but they are typically close to the simple rate for short periods and low rates.
Q3: When is this approximation most accurate?
A: The approximation is most accurate for low interest rates and shorter time periods where compounding effects are minimal.
Q4: Are there limitations to this approximation?
A: Yes, for high interest rates or long time periods, the approximation may deviate significantly from the exact effective rate calculated using continuous compounding formulas.
Q5: Should this be used for precise financial planning?
A: For precise financial decisions, especially involving large sums or long terms, exact compounding formulas should be used instead of this approximation.