Effective Annual Rate (EAR)
Effective Annual Rate (EAR)
\[EAR = \left(1+\frac{r}{n}\right)^n - 1\]
Variables
EAR = effective annual rate
r = nominal annual interest rate
n = number of compounding periods per year
Description
What is this formula?
The effective annual rate formula calculates the true annual interest rate after considering the effect of compounding periods within a year.
When to use it
Use this formula to compare financial products with different compounding frequencies.
Example
If the nominal annual interest rate is 12% compounded monthly:
EAR = (1 + 0.12/12)^12 - 1 ≈ 0.1268
The effective annual rate is approximately 12.68%.
Applications
Banking, loans, investment comparison, credit analysis, and financial planning.
Download the fCalc app to calculate this formula and thousands more:
