Effective Interest Rates Article Index Effective Interest Rates
Using spreadsheets to convert rates EIR, APR and credit card
interest Compounding periods Where does the exp come from? Net
and gross - tax allowances Examples and keypoints  Net and gross
- tax allowances  If interest is paid on a deposit then tax is
usually payable on the income. Normally interest rates are
quoted gross, i.e. without taking tax into account.  For
example, if the deposit of $100 earns 10% effective per annum
then $10 is earned in the first year, but T% of this has to be
paid in tax, i.e. reducing it by T%.  Thus the interest actually
received at the end of one year is:  tax paid
interest=PV*I*(1-T)  You should be able to see that the effect
of having to pay tax reduces the effective rate from I% to
I*(1-T)%.  An interest rate that doesn’t take tax into account
is called a gross rate and one that does is called a net rate.
To convert from gross to net use the formula:   net =
gross*(1-T)  to convert from net to gross use:   For