1. What is Effective Annual Rate?

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)
• \( n \) — Number of compounding periods per year

Explanation: The formula accounts for the effect of compounding by showing how interest builds upon itself over multiple periods.

3. Importance of EAR Calculation

Details: EAR is crucial for comparing financial products with different compounding frequencies. It shows the true cost of loans or true return on investments.

4. Using the Calculator

Tips: Enter nominal rate as a 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 provides a more accurate measure of true cost or return.

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

Q3: What's a typical EAR range?
A: For savings accounts, typically 0.5%-2.5%. For credit cards, often 15%-25%.

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

Q5: How to convert EAR back to nominal rate?
A: Use the inverse formula: \( i = n \times ((1 + EAR)^{1/n} - 1) \)