Overview
The Effective Annual Rate (EAR) Calculator allows you to convert a nominal interest rate into its effective annual equivalent, taking compounding frequency into account. This gives a more accurate picture of the true interest earned or paid over a year.
EAR is especially useful when comparing different financial products like savings accounts, loans, or investments with varying compounding intervals.
The tool also provides a visual comparison of how compounding frequency affects the effective annual rate. This helps investors and borrowers understand how compounding accelerates returns or costs over time.
Formula & Methodology
The formula for calculating EAR is:
EAR = (1 + i / n)n − 1
- i = Nominal annual interest rate (as a decimal)
- n = Number of compounding periods per year
Multiply the result by 100 to get the percentage. For instance, a nominal rate of 12% compounded monthly (12 times a year) results in an EAR of approximately 12.68%.
Examples
- Nominal Rate: 6%, Compounded Quarterly (n = 4) → EAR ≈ 6.14%
- Nominal Rate: 10%, Compounded Monthly (n = 12) → EAR ≈ 10.47%
- Nominal Rate: 5%, Compounded Daily (n = 365) → EAR ≈ 5.13%
Chart Insight
The chart plots Effective Annual Rate (EAR) against standard compounding frequencies like monthly, quarterly, or daily. It clearly shows how more frequent compounding results in a higher actual return compared to the nominal rate.
Use Cases
- Compare different loan offers with varying compounding frequencies
- Assess the real yield on savings or investment products
- Financial planning and decision making
- Determine the best return among several nominal interest options
FAQ
What is the difference between EAR and APR?
APR (Annual Percentage Rate) does not take compounding into account, while EAR does. EAR typically gives a more accurate measure of the true annual return or cost.
When should I use EAR?
Use EAR when comparing financial products that have different compounding periods — such as daily, monthly, or quarterly.
Does EAR include fees?
No, EAR is based only on the nominal rate and compounding. It doesn’t include additional fees or costs unless specified.
What does the EAR vs. Frequency chart show?
It displays how the Effective Annual Rate increases as the compounding frequency grows. For example, daily compounding results in a higher EAR than monthly or quarterly compounding, even if the nominal rate stays the same.