Effective Interest Rate

Financial Mathematics → Effective Interest Rate

The relation between Effective Rate of Interest and the Force of Interest.

We know that the Interest Earned is calculated by the formula:


In case of Effective interest rate and the force of interest, the Interest Earned is calculated by the formula

Interest Earned = Investment × Effective Rate of Interest

Example 1.
If a large pension fund with a value of $2000 million is assumed to grow steadily subject to a constant force of interest of 10% per annum, how much interest is earned every second?

Using the formula for Effective Rate of Interest, we have

And, the interest earned = investment x effective rate of interest