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.
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Pro Tip
When comparing savings accounts, look for the APY (= EAR), not the APR. Banks are required to disclose APY for deposits by the Truth in Savings Act.
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Did You Know?
Continuous compounding — where n approaches infinity — is described by the formula EAR = e^r − 1. At 12% nominal, this gives 12.7497% EAR — almost identical to daily compounding.
References
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