Effective Interest Rate Calculator
Reveal the true annualized return or borrowing cost across different compounding frequencies. Convert nominal stated interest rates into their true Effective Annual Rate (EAR).
Stated annual contract rate without compounding
How often interest is capitalized
True economic annual yield factoring compounding
How to Use This Calculator
- Enter the nominal stated interest rate.
- Select the compounding frequency (monthly, daily, quarterly, or semi-annually).
- View your true Effective Annual Rate (EAR) and continuous compounding equivalent.
Formula & Calculation Methodology
Compounding frequency m increases effective yield exponentially because accrued interest generates subsequent interest.
Worked Example
8.0% nominal rate compounded monthly
Frequently Asked Questions
Why is EAR always higher than the nominal rate?↓
Whenever interest compounds more than once per year (m > 1), interest earned in earlier periods compounds in later periods, increasing effective yield.
What is the difference between EAR and APY?↓
Effective Annual Rate (EAR) and Annual Percentage Yield (APY) are mathematically identical; US retail banking standardizes on the term APY for deposits.
Why do credit card companies quote daily compounding?↓
Credit cards typically compound interest on a daily basis (m = 365), slightly increasing their effective borrowing charge above the nominal APR.
What is continuous compounding?↓
Continuous compounding represents the mathematical upper limit where interest compounds constantly every microsecond using Euler constant e.
Related Calculators
Source Citation & Disclaimer
Informational tool only; not licensed tax, legal, or financial advice.