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How to Calculate Effective Annual Rate.
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How to Calculate Effective Annual Rate.

Rosemary Njeri

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.

Calculate Effective Annual Rate.

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.

Calculate Effective Annual Rate.

Thus, the EAR is 6.09%.

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