Effective Annual Rate Calculator
Convert a nominal rate into its true annual yield.
Results update as you type.
How it works
The effective annual rate shown here is the true yearly rate you actually earn or pay once compounding is taken into account, converted from a nominal rate quoted at a given compounding frequency. It matters because a nominal, or stated, rate understates the real cost or return whenever interest compounds more than once a year — each intra-year compounding period adds interest that itself earns interest, so the effective rate is always at least as high as the nominal rate and rises with more frequent compounding. This effective annual rate calculator divides the nominal rate by the number of periods, compounds it that many times, and expresses the result as a single annual figure. Doing so lets you compare products fairly: two accounts with the same nominal rate but different compounding schedules — one monthly, one daily — deliver different real returns, and only the effective rate reveals the difference. Savers use the effective annual rate to compare deposit accounts and CDs on equal footing, while borrowers use it to see the genuine cost of a loan or credit card whose rate is quoted nominally. Because it standardizes the effect of compounding into one number, the effective annual rate is the honest basis for comparison, which is why disclosure rules often require the effective figure, sometimes called APY on savings, to appear alongside the nominal rate.
EAR = [(1 + nominal ÷ 100 ÷ n)^n − 1] × 100, n = compounds per year
The nominal rate divided by 100 turns the percentage into a decimal, and dividing by n gives the rate charged in each compounding period, where n is the number of periods per year. Raising (1 + that periodic rate) to the power n compounds it across the whole year, capturing interest earned on earlier interest. Subtracting one strips out the original principal to leave the pure growth, and multiplying by 100 returns it to a percentage. The more compounding periods there are, the higher the effective rate climbs above the nominal one.
Source:U.S. SEC — Investor.gov
We review all our tools from time to time to ensure accuracy.
Worked example
How to use this calculator
- 1
Enter your values
Enter nominal annual rate and compounds per year.
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Adjust the options
Fine-tune any options to match your situation.
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Read your result
Effective annual rate updates instantly as you type — no button to press.
Frequently asked questions
What is the difference between nominal and effective rates?
The nominal rate is the stated annual rate before compounding is considered, while the effective annual rate reflects the true annual return or cost after compounding within the year. If interest compounds more than once a year, the effective rate is higher than the nominal rate, because interest is earned on interest partway through the year. Only the effective rate lets you compare products that compound at different frequencies on a fair, apples-to-apples basis.
Why does compounding frequency change the effective rate?
Each time interest compounds, it is added to the balance and starts earning interest itself. The more often that happens within a year, the more of these interest-on-interest cycles occur, so the effective rate rises. Daily compounding produces a higher effective rate than monthly, which beats annual, even when the nominal rate is identical. This is why comparing only the nominal rate can be misleading, and why the effective rate is the honest measure of what you actually get.
Is the effective annual rate the same as APY?
For savings products, yes — annual percentage yield (APY) is the effective annual rate that banks are required to disclose so savers can compare accounts fairly. On the borrowing side, the closely related concept appears alongside APR, though APR sometimes bundles in fees rather than pure compounding. The underlying math is the same: take a nominal rate and a compounding frequency and express the true annual effect as one standardized percentage.
How do I compare two accounts with this?
Enter each account's nominal rate and its compounding frequency, then compare the resulting effective annual rates rather than the stated rates. The account with the higher effective rate genuinely pays more, even if its nominal rate looks the same or slightly lower than a rival that compounds less often. This removes the distortion caused by different compounding schedules and gives you a single, comparable number for each option you are weighing.
What is continuous compounding?
Continuous compounding is the theoretical limit where interest compounds an infinite number of times per year, calculated with the exponential constant e rather than a finite number of periods. It produces the highest possible effective rate for a given nominal rate, though the difference from daily compounding is tiny in practice. This tool uses a finite number of periods that you specify, which matches how real accounts and loans actually compound.