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Effective Annual Rate (EAR), also called Annual Equivalent Rate (AER), is the actual annual interest rate accounting for compounding within the year. It allows comparison of loans or investments with different compounding frequencies.
Trin-for-trin guide
- 1EAR = (1 + r/n)^n − 1
- 2r = nominal (stated) annual rate, n = compounding periods per year
- 3Daily compounding always gives a higher EAR than monthly, which is higher than annual
- 4APY (Annual Percentage Yield) on savings accounts IS the EAR
Løste eksempler
Input
12% nominal, monthly compounding
Resultat
EAR = 12.68%
(1 + 0.12/12)^12 − 1
Input
12% nominal, daily compounding
Resultat
EAR = 12.75%
(1 + 0.12/365)^365 − 1
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