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Effective interest rate with transaction costs
Financial - Wealth
Saturday, 30 September 2006 18:00

The effective interest rate is a convenient way to compare different bank accounts and their conditions. See also more information on the effective interest rate.

Unfortunately the effective interest rate is difficult to compute in practice. Many bank accounts only offer the highest nominal rates when the client allows them to charge certain costs usually when the client withdraws money. These transaction costs complicate the formulas for the effective interest rate. In addition they make the effective interest rate dependent on what you actually do with your savings account: when you open it, when you withdraw money from it and when you close it.

This numerical example computes the effective interest rate taking many types of transaction costs into account. Enter below the initial savings amount, the nominal interest rate, the number of periods in which you make deposits to your savings and any costs your bank charges you. The computation will take the entered number of periods into account plus one. Therefore in the computation there will be an extra period after the last deposit.

The result are not always exact: in case the interest period is unequal to the time between the periodic deposits the computed interest rate is an approximation.

Convert interest:
Nominal rate (%):
Time interest payment:
Initial balance:
Periodically saved amounts:
Number of periods:
Per savings period ($):
Per year ($):
Per year (%):
At the beginning: ($)
At the end ($):
At the end (%):
Effective interest rate (%):