Effective annual rate: Comparing a Nominal Rate with Annual Growth
An effective annual rate captures the effect of compounding a nominal rate within the year. Use it when comparing rates quoted with different compounding frequencies.
Use the Effective annual rate Calculator to enter your own figures and compare the result with the worked example below.
Effective annual rate formula
EAR = (1 + nominal rate/m)^m − 1
Worked example
| Item | Example value |
|---|---|
| Annual nominal rate | 12 % |
| Compounds per year | 12 periods |
| Effective annual rate | 12.682503% |
These are illustrative inputs, not current prices, rates or recommended targets. Where a currency is shown, keep all comparable money amounts in the same currency; conversion examples identify the two sides separately.
How to interpret the result
Fees and cash-flow timing can still change the economic cost. EAR is not automatically the legally disclosed APR for a loan.
Related calculations
Method and further reading
The example follows the FinMathly calculator method. For broader background, see Investor.gov: Introduction to investing. The background resource may use jurisdiction-specific terms; it does not replace the assumptions of this calculator.
Featured photograph: Pexels.