What Is an Effective Annual Interest Rate?

Effective Annual Percentage Rate refers to the annual interest rate that can produce the same result once a year when the interest is calculated according to the interest rate of a given interest period and the number of compounding times per year.

Effective annual interest rate

When calculating interest based on a given interest rate period and the number of compounding times per year, the annual interest rate that can produce the same result once a year is called the effective annual rate, or both are equivalent

The calculation formula is as follows, where:

EAR is the effective annual interest rate,

r is the nominal interest rate,

n is the number of interest calculations in a year.

Relationship between effective annual interest rate and total yield:

EAR is the effective annual interest rate,

T is the number of years of holding period,

r (T) is the total rate of return.