3.3.8 Effective Interest Rate Let i be the nominal interest rate compounded annually. But, in practice, the compounding may occur less than a year. For example, compounding may be monthly, quarterly, or semi-annually. Compounding monthly means that the interest is computed at the end of every month. There are 12 interest periods in 38 Engineering Economics a year if the interest is compounded monthly. Under such situations, the formula to compute the effective interest rate, which is compounded annually, is Effective interest rate, R = bt icg-1 where, i = the nominal interest rate C = the number of interest periods in a year. EXAMPLE 3.9 A person invests a sum of Rs. 5,000 in a bank at a nominal interest rate of 12% for 10 years. The compounding is quarterly. Find the maturity amount of the deposit after 10 years