What is the Effective Annual Rate?
The Effective Annual Rate (EAR), also called the Annual Equivalent Rate (AER), is the actual annual return on an investment or actual annual cost of a loan after accounting for compounding.
The EAR Formula
EAR = (1 + r/n)n - 1
- r = nominal interest rate
- n = number of compounding periods per year
EAR Examples
Nominal rate of 6%:
- Annually (n=1): EAR = 6.000%
- Quarterly (n=4): EAR = 6.136%
- Monthly (n=12): EAR = 6.168%
- Daily (n=365): EAR = 6.183%
Why EAR Matters
Two products with the same nominal rate but different compounding frequencies have different effective rates. EAR lets you compare them on equal footing.
EAR vs APY
EAR and APY are essentially the same concept. APY is the term used by banks for savings products; EAR is used in academic and professional finance contexts.
Compare any compounding scenario using our compound interest calculator.