Financial Tool

Effective Interest Rate

Calculate the true annual interest rate considering the effect of compounding.

Effective Annual Rate
5.1162%

Calculated using the standard periodic compounding formula.

Σ The Formula

EAR = (1 + r/n)^n - 1

Real World Examples

Monthly Compounding
5% nominal rate compounded monthly = 5.116% effective rate.
Daily Compounding
5% nominal rate compounded daily = 5.127% effective rate.

# About This Calculator

The Effective Annual Rate (EAR), also known as the effective interest rate, is the real return on a savings account or any interest-paying investment when the effects of compounding over time are taken into account.

It is higher than the nominal rate because compounding generates interest on the interest earned in previous periods. Financial institutions often advertise the nominal rate, but the effective rate gives you the true cost of borrowing or the true return on investment.

How To Use

  1. Enter the **Nominal Annual Interest Rate** (as a percentage).
  2. Select the **Compounding Frequency** (Monthly, Quarterly, Daily, etc.).
  3. The **Effective Annual Rate** will update instantly.
  4. Compare this rate to other investment options to see which offers the best real return.

Frequently Asked Questions

What is a Nominal Rate?+

The nominal rate is the stated interest rate before taking compounding into account. It is usually what is written in the primary text of a loan agreement.

Why is the Effective Rate always higher?+

Because it includes 'interest on interest'. Each time interest is added to your balance, the next interest calculation is based on that slightly larger balance.

Is Effective Interest Rate free to use?+

Yes, Effective Interest Rate on Matheric is completely free to use. We believe in accessible education and utility for everyone.

How accurate is Effective Interest Rate?+

We use standard mathematical formulas and high-precision computing algorithms to ensure results for Effective Interest Rate are accurate for academic and professional use.

Can I use Effective Interest Rate on my phone?+

Yes! Effective Interest Rate is fully responsive and optimized for all devices, including smartphones, tablets, and desktops.

Do you save my data?+

No. We prioritize your privacy. All calculations are performed in your browser or temporarily processed, and we do not store your personal input data.

About

The Effective Annual Rate (EAR), also known as the effective interest rate, is the real return on a savings account or any interest-paying investment when the effects of compounding over time are taken into account.

It is higher than the nominal rate because compounding generates interest on the interest earned in previous periods. Financial institutions often advertise the nominal rate, but the effective rate gives you the true cost of borrowing or the true return on investment.

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