Effective Annual Rate Formula

Formula

EAR = (1 + i / m )m - 1
Where
i = Annual nominal rate of interest
m = Number of compounding periods in a year

Use

The effective annual rate formula calculates the rate of interest for a year based on a nominal rate (i) compounded a number of times a year (m).

The effective annual rate is sometimes abbreviated to EAR and often referred to as the annual equivalent rate or AER.

Excel Function

The Excel EFFECT function can be used instead of the effective annual rate formula, and has the syntax shown below.

EFFECT(i,m)

Effective Annual Rate Formula Example

If the nominal rate is 9% compounded quarterly, what is the effective annual rate?

The effective interest rate for the year is calculated using the effective annual rate formula as follows:

Effective annual rate = (1 + i / m )m - 1
i = annual nominal rate = 9%
m = compounding periods in a year = 4
Effective annual rate = (1 + 9% / 4 )4 - 1
Effective annual rate = 9.308%

The same answer can be obtained using the Excel EFFECT function as follows:

Effective annual rate = EFFECT(i,m)
i = 9%
m = 4 
Effective annual rate = EFFECT(9%, 4)
Effective annual rate = 9.308%

The effective annual rate formula is one of many used in time value of money calculations, discover another at the links below.

Effective Annual Rate Formula November 6th, 2016Team

You May Also Like


Related pages


example amortization schedulecash flow statement calculatoraccounting equation chartpetty cash reimbursement journal entrydeferred taxation definitionsales and purchase ledgersjournal entries for accumulated depreciationfixed asset register excel templatemark up calculatorexamples of capital employedpayroll reconciliation template excelfv calculator annuityhow to maintain accounts for small business in excelcalculate irr in exceljournal entries that bring accounts up to dateunearned creditaverage accounts receivablesstockholder equityformula for quick ratio in accountingformula for equity multipliershrinkage accountingpros and cons of reversing entriesdeferred billing definitiontotal overhead appliedjournal entry for fair value adjustmentdividends equationexamples of journalizing transactionsperpetual lifo examplesalary payable journal entryequity method journal entriesbook keeping equationaccounting balance sheet calculatorprojected balance sheet template exceloutstanding loan calculatordisposal of asset not fully depreciatedfixed asset schedule templatecarriage on sales in trading accountcalculate markup percentmarketable securities formulafifo calculatorconvert operating lease to capital leasebookkeeping and accounting notesbookkeeping journal entriesproject payback period calculatorunearned revenues account is an example of a liabilityprofit margins formuladepreciation residual value calculationfob point destinationwhat are consumable suppliesunpresented cheques definitionfifo accounting exampleaccumulated depreciation examplehow to calculate gp margincost volume profit graph excel templatetrial balance usesaccounting tutorialsunderapplied manufacturing overheaddamaged inventory accountingprofitability index calculator financialdebenture payablejournal voucher entriesdouble entry for loan repaymentperiod cost formulahow to reconcile retained earningspmt pvsample general ledgerusing pmt in excelgross profit vs markupweighted average inventory methodcreditors reconciliation templatecompounding periods per yearsales mix examplefixed asset disposal journal entryis dividends payable a current liabilityprepaid insurance journal entry examplemeaning of account payable and receivablehow to work out retained profit