1. What is the EAR Formula?

The EAR (Effective Annual Rate) formula calculates the actual interest rate when compounding occurs more frequently than once per year. It provides a way to compare different investment or loan options with varying compounding periods.

2. How Does the Calculator Work?

The calculator uses the EAR equation:

Where:

• \( r \) — Nominal annual interest rate (in decimal form)
• \( n \) — Number of compounding periods per year

Explanation: The equation accounts for the effect of compounding by raising the periodic rate to the power of the number of compounding periods.

3. Importance of EAR Calculation

Details: EAR is crucial for comparing financial products with different compounding frequencies. It shows the true cost of borrowing or true return on investment.

4. Using the Calculator

Tips: Enter the nominal rate as a decimal (e.g., 0.05 for 5%), and the number of compounding periods as an integer (e.g., 12 for monthly). Both values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APR and EAR?
A: APR is the nominal rate without compounding, while EAR includes compounding effects and shows the actual annual rate.

Q2: How does compounding frequency affect EAR?
A: More frequent compounding results in a higher EAR for the same nominal rate.

Q3: What's the EAR for continuous compounding?
A: For continuous compounding, use the formula \( EAR = e^r - 1 \) where e is Euler's number (~2.71828).

Q4: Can EAR be less than the nominal rate?
A: No, EAR is always equal to or greater than the nominal rate due to compounding effects.

Q5: How is EAR used in financial decisions?
A: EAR helps compare loans or investments with different compounding periods to find the best option.