Effective Annual Rate Calculator

Calculate the effective annual rate (EAR) from a nominal annual rate and compounding frequency. This calculator helps you understand the actual interest rate you're paying or earning after accounting for compounding.

Input Parameters

Calculation Results

Calculation Formula

EAR = (1 + r/n)^n - 1

Where:
r = Nominal Annual Rate
n = Compounding Frequency per Year

The effective annual rate accounts for the effect of compounding and shows the true cost or return of an investment or loan over a year.

Effective Annual Rate Calculator Usage Guide

Learn how to use the Effective Annual Rate Calculator and understand the concept of EAR

What is the Effective Annual Rate (EAR)?

The Effective Annual Rate (EAR) is the actual interest rate that would be paid on a loan or realized on an investment if the stated annual rate is compounded more frequently than annually. It takes into account the effect of compounding and provides a more accurate measure of the true cost or return of a financial product.

How to Use This Calculator

  1. Enter the Nominal Annual Rate (the stated interest rate before accounting for compounding). For example, if a bank states that your savings account earns 5% annually, enter 5.
  2. Select the Compounding Frequency per year. This is how often the interest is compounded. Common options include annually, semi-annually, quarterly, monthly, daily, and continuous compounding.
  3. Click the Calculate button to compute the Effective Annual Rate.
  4. The result will be displayed in the EAR field, showing the true annual rate after accounting for compounding.

Example

If you have a savings account that offers a nominal annual interest rate of 5% compounded monthly, the Effective Annual Rate would be approximately 5.12%. This means that after one year, you would earn 5.12% interest, not just 5%.

When to Use EAR

Use EAR when comparing financial products with different compounding periods. For example, if you're choosing between a loan with a 6% annual rate compounded monthly and another with a 6.1% annual rate compounded annually, the EAR will help you determine which loan is actually more expensive. The first loan has an EAR of approximately 6.17%, making it more expensive than the second loan.