tailieunhanh - Effective Interest Rate (EIR)

The first part of the article deals with the relation- ship between Eurosystem monetary policy decisions and market interest rates. It looks, on the one hand, at the links between central bank rates and money market rates and, on the other hand, at the trend during the crisis of the risk-free yield curve, . that of AAA-rated euro area government bonds. The second section addresses the question of long-term market rates harbouring credit risk. We examine the financing costs of the public sector and the financial and non-financial private sector, as well as the relationship between the two, at both the. | William R. Tucker Effective Interest Rate EIR EIR 1 Periodic Interest Rate Anumber of periods in a year - 1 EIR 1 i An - 1 The term Periodic in Periodic Interest Rate refers to the time between installments daily weekly biweekly monthly etc. . This is important to determine the n in the above formula the number of periods in a year. For example a loan product with weekly installments would have an n of 52 since there are 52 weeks in a year. A loan with monthly payments would have an n of 12. CAUTION so-called monthly payments may actually be payments every 28 days. As in your payment falls due every fourth Thursday. Whereas there are 12 months in a year there are 13 periods of 28 days. This will affect the EIR calculation. Note the difference between the EIR and the easier-to-calculate Annual Percentage Rate APR the interest rate which for example all . lenders must publish as per the Truth in Lending law APR the Periodic Interest Rate times the number of periods in a year APR i n Examples Loan Amount Frequency of Installments Number of Installments Periodic Interest Rate Annual Percentage Rate Effective Interest Rate 2 500 Weekly 8 1 52 7 500 Weekly 8 1 52 7 500 Weekly 12 1 52 Not relevant Bi-Weekly Not relevant 1 26 Monthly 1 12 Every 4 weeks 1 13 The examples in the first three rows demonstrate that the loan amount and the actual number of installments to be paid are not relevant to determine interest rates. What is relevant is the periodic interest rate and the number of such periods per year. There s only one important detail left to cover how exactly to determine that all-important periodic interest rate. Bankakademie Micro Banking Competence Center 5-6 September 2000 7 William R. Tucker PERIODIC INTEREST RATE The financial term interest rate refers to the number applied to the outstanding balance of a loan to determine the amount of interest to be paid with each installment. Below are a few examples of a periodic .