It is used to compare the interest rates between loans with different compounding periods.
When the frequency of compounding is increased up to infinity (as for many processes in nature) the calculation simplifies to: where
Effective interest is the standard in the European Union and many other countries, while APR is often used in the United States.
Since a loan by a borrower is an investment for the lender, both terms can apply to the same transaction, depending on the point of view.
For a zero-coupon bond such as a US treasury bill, an annual effective discount rate may be specified instead of an effective interest rate, because zero coupon bonds trade at a discount from their face values.