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Effective Annual Rate (EAR)
Calculation Principles & Formulas
The Effective Annual Rate (EAR) represents the actual annual return or cost of a loan or investment when compounding is taken into account. It allows for comparison of financial products with different compounding frequencies.
[EAR Formulas]
1. Standard Compounding:
EAR = (1 + i / n)^n - 1
2. Continuous Compounding:
EAR = e^i - 1
Legend:
i = Nominal Annual Interest Rate (decimal)
n = Compounding Periods per Year
e = Euler's Number (approx. 2.71828)
Note: More frequent compounding results in a higher EAR. For example, daily compounding yields a higher return than annual compounding for the same nominal rate.
How to Use
How to Use
- Enter the Nominal Interest Rate (e.g., 5.0 for 5%).
- Select the Compounding Frequency (e.g., Monthly, Daily, or Continuous).
- Click the 'Calculate EAR' button.
- The Effective Annual Rate (EAR) will be displayed in the results section.
Tips
- The Effective Annual Rate (EAR) reflects the true return taking compounding into account.
- Higher compounding frequency (e.g., Daily vs. Annually) results in a higher EAR for the same nominal rate.
- This calculator assumes a 365-day year for daily compounding.
- All calculations are performed locally in your browser for privacy.
