Effective Interest Rate Calculator
Convert a nominal (stated) interest rate to an effective annual rate based on compounding frequency, and compare with continuous compounding.
Results
What is it?
The Effective Annual Rate (EAR), also called Annual Percentage Yield (APY), is the actual annual rate you earn or pay once compounding is taken into account. A 12% nominal rate compounded monthly is not 12% per year — it is actually 12.68% because interest earns interest within the year.
How to use
1. Enter the nominal (stated) annual interest rate. 2. Select the compounding frequency from the dropdown. The calculator shows the effective annual rate for your chosen frequency and also the theoretical maximum under continuous compounding.
Example scenario
A savings account advertises a 5% nominal rate compounded monthly. The effective annual rate is (1 + 0.05/12)^12 − 1 ≈ 5.1162%. Under continuous compounding, it would be e^0.05 − 1 ≈ 5.1271%. The difference is small but adds up over large balances and long time horizons.
Pro tip
When comparing bank accounts or loans, always compare EAR (APY) rather than nominal rates. The more frequently interest compounds, the higher the effective rate. Daily compounding is very close to continuous compounding for most practical purposes.