How to Calculate Effective Annual Rate
What is Effective Annual Rate?
Effective Annual Rate (EAR), also called Annual Equivalent Rate (AER), is the actual annual interest rate accounting for compounding within the year. It allows comparison of loans or investments with different compounding frequencies.
Step-by-Step Guide
- 1EAR = (1 + r/n)^n − 1
- 2r = nominal (stated) annual rate, n = compounding periods per year
- 3Daily compounding always gives a higher EAR than monthly, which is higher than annual
- 4APY (Annual Percentage Yield) on savings accounts IS the EAR
Worked Examples
Input
12% nominal, monthly compounding
Result
EAR = 12.68%
(1 + 0.12/12)^12 − 1
Input
12% nominal, daily compounding
Result
EAR = 12.75%
(1 + 0.12/365)^365 − 1
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