Question 1

What is the Effective Annual Rate (EAR)?

Accepted Answer

The EAR is the actual annual interest rate you earn or pay, accounting for the effect of compounding. Unlike the nominal rate, the EAR reflects the true cost or return of a financial product.

Question 2

How is the EAR calculated?

Accepted Answer

The formula is: EAR = (1 + r/n)^n - 1, where r is the nominal annual rate and n is the number of compounding periods per year (12 for monthly, 365 for daily, etc.).

Question 3

What is the difference between nominal rate and EAR?

Accepted Answer

The nominal rate is what banks advertise. The EAR accounts for compounding and represents the true annual cost or yield. Whenever compounding is more frequent than once per year, EAR will be higher than the nominal rate.

Question 4

Is EAR the same as APY?

Accepted Answer

Yes, APY (Annual Percentage Yield) is the same concept as EAR. Both represent the actual annual return after compounding is applied.

Effective Annual Rate (EAR) Calculator