Effective annual rate (EAR) is the rate actually earned on investment or paid on the loan after compounding over a given period of time.
EAR is used to compare financial products with different compounding periods.
Formula to calculate EAR.
n = number of compounding periods
i = nominal rate or the given annual rate of interest
Example:
Suppose the nominal rate is 6%, compounded twice. Calculate the EAR.
Thus, the EAR is 6.09%.
