1. What is Effective Annual Rate (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 (as decimal)
• \( n \) — Number of compounding periods per year

Explanation: The formula accounts for the effect of compounding interest, showing the true annual cost or return of a financial product.

3. Importance of EAR Calculation

Details: EAR is crucial for comparing loans or investments with different compounding frequencies. It shows the "real" annual rate when compounding is considered.

4. Using the Calculator

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

5. Frequently Asked Questions (FAQ)

Q1: Why is EAR higher than the nominal rate?
A: EAR includes the effect of compounding, so it's always equal to or higher than the nominal rate (except when compounding annually).

Q2: How does compounding frequency affect EAR?
A: More frequent compounding (e.g., daily vs. monthly) results in a higher EAR for the same nominal rate.

Q3: What's the difference between EAR and APR?
A: APR is the nominal rate, while EAR is the actual rate after compounding. EAR provides a more accurate comparison.

Q4: When is EAR equal to the nominal rate?
A: Only when interest is compounded annually (n=1).

Q5: How is EAR used in financial decisions?
A: EAR helps compare loans or investments with different compounding periods to find the best option.