Oh, let's calculate some effective interest rates. The below two savings account in this example, both carry an interest of 5% per annum. However, account A pays interest annually while account B pays interest monthly. Calculate the effective interest rate for the two account. Well, first of all, account a 5% per annum pays annually. Well, the interest on the account and the effective interest on this account will be the same. It will be 5%. So you'll start the year with a hundred. The end of the year, you get your 5% return. You finish the year at 105. What about account B? Well, account B pays interest monthly, so the monthly interest would be 5% divided by 12, 0.4%.

However, of course, that is just a one monthly interest rate.

In order to see how much we're getting across the year, we of course have to repeat that calculation 12 times. So to the power of 12, I hit enter deduct one, and I can see that my effective rate for the year is five point 12%. Let's do it another way.

So let's look at the monthly value of this account. Well, it starts at say a hundred at month zero. In one month, that would've grown by 5%, divided by 12.

So in one month, the value of that account would've been 100.42 But hold on a minute guys. We were looking at the annual effective interest rate. So we are gonna have to copy that formula all the way down to 12 months and we will see at the end of that period, our account value would be 105.12, divide that 105.12 with the original amount, which was 100, and take away 1. And we will see that our effective interest rate was 5.12%.