๐ Effective Annual Rate (EAR) Calculator
The more frequently interest compounds, the higher the effective rate is compared to the nominal rate.
Enter a nominal annual interest rate (the stated rate) and how often it compounds per year (monthly, quarterly, daily, etc.) to calculate the Effective Annual Rate (EAR, also called APY) โ the actual annual return you earn or pay. The more frequently interest compounds, the higher the effective rate is compared to the nominal rate.
How to use
- Enter the nominal annual rate (%).
- Enter the number of compounding periods per year, or pick a preset.
- The effective annual rate is calculated automatically.
FAQ
What's the difference between the nominal rate and EAR?
The nominal rate is the stated annual rate as-is. When interest compounds more than once a year, the actual annual return you earn (or pay) ends up higher than the nominal rate โ that actual figure is the Effective Annual Rate (EAR).
What formula is used?
EAR = (1 + nominal rate รท compounding periods)^compounding periods โ 1. When compounding periods = 1 (once a year), EAR equals the nominal rate.
Why does more frequent compounding increase EAR?
The shorter the compounding interval, the more often earned interest gets added to the principal and starts earning interest itself, so the same nominal rate produces a higher effective annual return.