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Effective Interest Rate

Calculate the effective annual rate (EAR) from a nominal interest rate and compounding frequency.

Rate Details

About Effective Interest Rate

The effective annual rate (EAR) is the actual annual rate of return, taking into account the effect of compounding interest. It's higher than the nominal rate when interest compounds more than once per year.

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

Where:
  • EAR = Effective annual rate
  • r = Nominal interest rate (decimal)
  • n = Number of compounding periods per year

Why It Matters

For Borrowers

  • Shows true cost of a loan
  • Helps compare loans with different compounding
  • Higher EAR means higher actual interest cost

For Investors

  • Shows true return on investment
  • Helps compare investments with different compounding
  • Higher EAR means better actual returns

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