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27 June, 14:23

Which type of interest rate reflects the effects of compounding?

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  1. 27 June, 14:40
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    It is called effective interest rate.

    For example, you invest in a bond wich pays 5% annual interest rate and it compounds semiannually.

    The first semester you win 2.5% over the capital invested and in the second semester you win 2.5% over the capital plus the interested earned in the first semester. Then the effecive interest rate is higher than 5%.
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