Overview

Effective annual rate (EAR), also referred to as effective interest rate or effective rate, is the rate of interest at which investors earn on investment or pay on a loan considering the compounding effect. The EAR is usually higher than the nominal interest rate and is used by investors to compare investments which calculate annual interest with different compounding periods. The effective annual interest rate formula is:

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

Where:

i = nominal interest rate

n = number of compounding periods

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