Finance & Interest
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Effective Annual Rate

True annual rate accounting for compounding.

Formula

EAR=(1+rn)n−1EAR = \left(1 + \frac{r}{n}\right)^n - 1

Variables

rNominal rate
nCompounds/year

Example

12% compounded monthly gives an effective annual rate of (1.01)¹² − 1 ≈ 12.68%.

Did You Know?

A 12% rate compounded monthly actually costs about 12.68% a year — the effective rate reveals the truth.

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