How to Calculate an Effective Rate

Formula Interest
Proceeds X Time
Example: $20,000 note was discounted at a rate of 15% for 90 days.

Systematic Instructions Step 1. Formula: Principle X Rate X Time = Interest $20,000 X .15 X 90/360 = $750 Formula: Principle Interest = Proceeds $20,000 - $750 = $19,250 Step 3. Formula: Interest / Proceeds X Time = Effective Rate $750/ $19,250 X 90/360 = $750/ 4812.50 = .15584 Or 15.58%

Step 2.

Note: Remember to always multiply the bottom two amounts first and then divide the results into the top number. Round to the fourth place after the decimal place and then move the decimal place over two to the right to change it into a percentage. At the time of the loan the borrower will receive the proceeds of $19,250. At the maturity date the borrower will pay back $20,000 to the lender.

MJC Revised 1/2012

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