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


income tax payable journal entrydebit credit balance sheet excelimpersonal ledgerjournal entry unrealized gainfob transportationdebits and credits made easycash receipt journal templateexcel effective interest rateexcel formula for interest ratehow to calculate retained earnings on balance sheetaccounting conventions and principleswhat is transposition in accountingwhat is inventory turnover ratio formulacalculate ropdividend declared journal entrydebtors balance sheetexample of single entry bookkeepinginventory turnaroundtable of future value annuity factorsaccounting debits and credits examplesblank trial balance sheetaverage days sales in inventorycomputing cost of goods manufacturedbookkeeping sheetsoverhead apportionmentgeneral ledger template excelextended dupont analysisexamples of intangible assets on the balance sheetdepreciation spreadsheetbookkeeper duties checklistcash receipt book sampleopening entry in general journalamortisation and depreciationfinance lease journal entries lessorcontribution margin analysis examplecost accounting overheadsdiscounting of debtorspv of a perpetuitysuspense account is which type of accountperiodic inventory system vs perpetual inventory systemreceivable turnover ratio calculatordiscounting rate formulaprepaid insurance income statementredeemable preference shares accounting treatmentshipping fob definitionhow to calculate debtors collection periodaccounting quizesdeferred revenue accounts receivablebond amortization schedule straight line methodoperating cash flow margin formulabad debt expense entriesbank reconciliation definition in accountingaccounting system flowchartinterest revenue income statementjournal entry for tax payablewhat is the allowance for doubtful accountsdebt to equity ratio examplesrequisition slip sampleformula for calculating gross profit marginhow to calculate wip inventorydeclare dividendcontribution margin formulaaccrual accounting examplesdiscount on bonds payable balance sheeteom paymenttime sheet exampleaccount receivable interview questions and answersexample of petty cash vouchercontra revenuessimple bookkeeping spreadsheetsimple bookkeeping with excelaccounts receivable general ledgerobsolete stockjournal entries quizadjusting entry definitiondeferred tax accounting journal entriescash flow statement analysisformula to calculate accumulated depreciationcalculator present value of annuity