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The term should not be confused with simple interest (as opposed to compound interest) which is not compounded.
The [[effective interest rate]] is always calculated as if compounded annually. The effective rate is calculated in the following way, where <itl>r</itl> is the effective rate, i the nominal rate (as a decimal, e.g. 12% = 0.12), and n the number of compounding periods per year (for example, 12 for monthly compounding):
:<math> r \ = \ (1+i/n)^n - 1</math>
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