The effective annual rate represents the actual rate of interest earned or paid on a financial product. It takes the effect of compounding in accounts for the calculation of the actual interest rate. Effective Annual Rate Calculator is an online tool. It helps in representing the difference in the stated or nominal rate of interest and actual interest rate after compounding. This eventually helps in comparing the available options. This makes a lot of difference in the actual return and the consequent rate of return for long-maturity investments.
The nominal or stated interest rate is always lesser than the EAR. It is also known as the annual equivalent rate or effective interest rate. Before making any type of investment, the investor should always take into account the effective annual rate. And in the normal course, the investor believes that they pay a single interest rate without considering the impact of compounding. Nowadays, compounding is called the ninth wonder of the world.
For calculating the effective annual rate, consider the following formula:
Effective Annual Rate = (1 + i/n)n – 1
Where i = Rate of Interest
n = Number of Compounding Interest
Effective Annual Rate Calculator
How to Calculate using Calculator?
The person calculating the effective annual rate through EAR Calculator has to provide the following details for instant calculation.
Rate of Interest – It is the interest rate by which the financial product is compounded. And this is usually the (nominal) interest rate mentioned on the security and offer document.
Number of Compounding Periods – It defines the number of periods for which compounding of interest takes place. Further, the effective annual rate increases with an increase in periods of compounding. This means compounding monthly will provide a higher effective annual rate in comparison with one that is compounded annually.
