# Calculate Effective Annual Rate for 6% Compounding Indefinitely

• JimmyJockstrap
In summary, the formula for calculating the effective annual rate for 6% compounding indefinitely is: Effective Annual Rate = (1 + (6%/n))^n - 1. The value of "n" represents the number of compounding periods in a year and can be determined based on the frequency of compounding. This formula can be used for any type of compounding. Calculating the effective annual rate allows for better comparison of investment opportunities and is not the same as the annual percentage rate (APR), which only reflects the stated interest rate.
JimmyJockstrap
periods.

Like (1+6%/100)^100-1=0.061817441

(1+6%/1000)^1000-1=0.061834635

does it converge to a limit of like 0.06184 or something like that?

And for x= 0.06, that limit is e.06-1.

how would you solve that limit would you use l'hopitals or something like that?

## What is the formula for calculating the effective annual rate for 6% compounding indefinitely?

The formula for calculating the effective annual rate for 6% compounding indefinitely is:

Effective Annual Rate = (1 + (6%/n))^n - 1

## How do I know what value to use for "n" in the formula?

The value of "n" represents the number of compounding periods in a year. For example, if interest is compounded monthly, "n" would be 12. If interest is compounded quarterly, "n" would be 4.

## Can I use this formula for any type of compounding?

Yes, this formula can be used for any type of compounding, whether it is annually, semi-annually, quarterly, or monthly.

## Why is it important to calculate the effective annual rate?

Calculating the effective annual rate allows you to compare different investment opportunities that may have different compounding periods. It takes into account the effect of compounding on the overall return and provides a more accurate representation of the annual rate of return.

## Is the effective annual rate the same as the annual percentage rate (APR)?

No, the effective annual rate takes into account the compounding of interest, while the APR only reflects the stated interest rate. The effective annual rate is typically higher than the APR.

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