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The effective annual interest rate is the true interest rate on an investment or loan that accounts for the effects of compounding. The more frequent the compounding periods, the higher the...
Effective Annual Rate Formula. The Effective Annual Rate Calculator uses the following formula: Effective Annual Interest Rate (i) = (1 + r/n) n − 1. Where, i is the effective annual interest rate (expressed as a decimal), r is the nominal interest rate (expressed as a decimal), n is the number of compounding periods per year. EAR Calculator.
Learn the formula to convert a stated interest rate to an effective interest rate. The effective interest rate is calculated using a simple formula: r = ( 1 + i / n ) n − 1. {\displaystyle r=(1+i/n)^{n}-1.}
The formula for effective annual interest rate is: (1 + i / n) n - 1. Where: i = the stated annual interest rate. n = the number of compounding periods in one year. For example, let’s assume you buy a certificate of deposit with a 12% stated annual interest rate.
The formula for the EAR is: Effective Annual Rate = (1 + (nominal interest rate / number of compounding periods)) ^ (number of compounding periods) – 1. For example: Union Bank offers a nominal interest rate of 12% on its certificate of deposit to Mr. Obama, a bank client.
The EIR formula in finance takes the following general form: EIR = (1 + r / m)m − 1. where: EIR — Effective interest rate; r — Annual interest rate, which is the nominal interest rate in percent, also called the stated or quoted rate; and. m — Compounding periods, which is the number of times compounding occurs in a year.
You can use the effective annual rate (EAR) calculator to compare the annual effective interest among loans with different nominal interest rates and/or different compounding intervals such as monthly, quarterly or daily.