The effective interest rate (EIR) for a deal is calculated using the following formula:

Here* CF(t _{0})* represents the initial cash flows for the deal (i.e. the outpayment of the nominal amount by the bank plus/minus possibly arising transaction costs, premiums/discounts or upfront payments),

*CF(t*stands for the cash flows for the deal at further payment dates

_{i})*t*and

_{i}*Δ(t*is the time gap between payment date

_{i},t_{0})*t*and deal orgination date

_{i}*t*.

_{0}Hence, the EIR is calculated by implicitly solving the above non-linear equation. In the solution, this is performed by using a Newton iteration.

The above formula expresses that the EIR exactly discounts the estimated future cash payments or receipts through the expected life of a financial instrument to its net carrying amount.