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    vgray's Avatar
    vgray Posts: 1, Reputation: 1
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    #1

    Dec 12, 2007, 12:42 PM
    How does a financial manager choose between stated interest and an effective interest
    When a borrower is often confronted as a stated interest and an effective interest rate what is the difference and which one should the financial manager recognize as the true cost of borrowing?

    The effective interest rate is always calculated as if compounded annually. The effective rate is calculated in the following way, where r is the effective rate, I the nominal rate, and n the number of compounding periods per year (for example, 12 for monthly compounding):

    Effective rate is the interest rate on a loan or financial product restated from the nominal interest rate as an interest rate with annual compound interest

    I got this part but I don't understand on how a financial manager would choose for the borower?:D
    manik chand dey's Avatar
    manik chand dey Posts: 63, Reputation: 2
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    #2

    Nov 11, 2008, 04:01 AM
    It is the effective interest rate that really matters.orin other words it is called the annualized yield.Now ifa borrower has decided totake a loan on semi annually compounded basis,then the money will yield an interest rate,equal to the effective rate ofinterest.
    codyman144's Avatar
    codyman144 Posts: 544, Reputation: 31
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    #3

    Nov 12, 2008, 10:57 PM

    The financial manager is working for the borrower. Companies borrow money all the time...
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