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%.