1. What Is APR And EAR?

APR (Annual Percentage Rate) is the nominal annual interest rate without considering compounding effects, while EAR (Effective Annual Rate) is the actual annual interest rate that accounts for compounding frequency throughout the year.

2. How Does The Calculator Work?

The calculator uses the EAR formula:

Where:

• \( APR \) — Annual Percentage Rate (as a decimal)
• \( n \) — Number of compounding periods per year
• \( EAR \) — Effective Annual Rate (as a decimal)

Explanation: The formula converts the nominal APR into the actual annual rate by accounting for how frequently interest is compounded during the year.

3. Importance Of EAR Calculation

Details: EAR provides a true comparison of different financial products by showing the actual annual cost of borrowing or the actual annual return on investment, making it essential for informed financial decisions.

4. Using The Calculator

Tips: Enter APR as a percentage (e.g., 5 for 5%), and the number of compounding periods per year (e.g., 12 for monthly compounding). All values must be valid (APR ≥ 0, n ≥ 1).

5. Frequently Asked Questions (FAQ)

Q1: Why is EAR different from APR?
A: APR doesn't account for compounding frequency, while EAR shows the actual annual rate including compounding effects, making EAR typically higher than APR.

Q2: What are common compounding frequencies?
A: Annual (n=1), Semi-annual (n=2), Quarterly (n=4), Monthly (n=12), Weekly (n=52), Daily (n=365).

Q3: When is EAR most important?
A: When comparing loans or investments with different compounding frequencies, as it provides an apples-to-apples comparison of true annual rates.

Q4: Can EAR be lower than APR?
A: No, EAR is always equal to or greater than APR when there's positive interest, as compounding increases the effective rate.

Q5: How does continuous compounding work?
A: For continuous compounding, use the formula EAR = e^(APR) - 1, where e is Euler's number (approximately 2.71828).