# Examples for Calculating the Effective Interest

The examples are all cases in which the added expenses are on a percentage basis.

## Example 1

Bill received a \$10,000 one-year loan at 12% nominal interest, i.e. the adjusted interest is equal to the nominal interest and the interest is paid at the end of the year.

Bill is also charged 2% credit allocation fees. In this example, the nominal interest is 12%, and the effective interest is 14% (12% + 2%). At the end of the year, Bill repays \$11,400:

\$10,000 in principal, \$1,200 in interest, and \$200 in credit allocation fees.

## Example 2

David received a \$10,000 one-year loan at a 12% nominal interest rate. Interest is calculated on an adjusted interest rate format, and on a monthly basis. David is also charged 2% credit allocation fees. In this example:

 The nominal interest is 12% The adjusted interest is 12.68% The effective interest is 14.84% (the calculation method is described below)

The effective interest is calculated in two stages, as follows:

Stage I – calculation of the actual interest. In our example, this is 14% (= 12% + 2%).

Stage II – calculation of the adjusted interest, based on the actual interest (14%).

We will perform the calculations in the table:

 Month Price of the Basket (Prices are Not Real) Index in Points Monthly Price Rise Cumulative Price Rise (1) (2) (3) (4) (5) 1/2007 \$250 100 2/2007 \$260 104 4% 4% – compared with the first observation 3/2007 \$265 106 2% 6% – compared with the first observation

And so forth for the other months of the year.