1. What is the EAR?

The Effective Annual Rate (EAR) is the actual interest rate that an investor earns or pays in a year after accounting for compounding. It provides a way to compare different investment or loan options with different compounding periods.

2. How Does the Calculator Work?

The calculator uses the EAR formula:

Where:

• \( i \) — Nominal interest rate (in decimal form)
• \( m \) — Number of compounding periods per year

Explanation: The formula accounts for the effect of compounding by raising the periodic rate to the power of the number of compounding periods.

3. Importance of EAR Calculation

Details: EAR allows for accurate comparison between financial products with different compounding frequencies. It shows the true cost of borrowing or true return on investment.

4. Using the Calculator

Tips: Enter the nominal annual interest rate (as decimal, e.g., 0.05 for 5%) and the number of compounding periods per year (e.g., 12 for monthly).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APR and EAR?
A: APR doesn't account for compounding, while EAR does. EAR gives the true annual rate when compounding is considered.

Q2: How does compounding frequency affect EAR?
A: More frequent compounding leads to higher EAR for the same nominal rate.

Q3: What's a good EAR?
A: For savings, higher EAR is better. For loans, lower EAR is better. Compare EARs when evaluating options.

Q4: Can EAR be less than the nominal rate?
A: No, EAR is always equal to or greater than the nominal rate due to compounding effects.

Q5: How do I convert percentage to decimal?
A: Divide the percentage by 100 (e.g., 5% = 0.05).