Nominal vs Effective Interest Rate Calculator: Compare Rates Easily
A nominal 10 % loan compounded daily actually costs 10.52 % per year—over half a percent more—once you account for the 365 compounding periods (FDIC Consumer News, 2023).
Nominal and Effective Rates Calculator
Effective Annual Rate:
How to use the tool
Enter the Nominal Rate (%) – type the advertised rate. Example 1: 6.25. Example 2: 9.10.
Select Compounds per Year – pick how often interest posts. Example 1: Semi-annually (2). Example 2: Daily (365).
Press “Calculate” – the tool shows the Effective Annual Rate (EAR) instantly.
Read the results – Example 1 outputs 6.39 %; Example 2 outputs 9.53 %.
Compare offers – choose the product with the lower EAR when borrowing or the higher EAR when investing.
Quick-Facts
EAR formula: $$\left(1+\dfrac{r}{n}\right)^{n}-1$$ where r is nominal rate, n periods (FRB Education, 2022).
Daily compounding can raise costs by about 0.52 % on a 10 % loan (FDIC Consumer News, 2023).
APY always equals or exceeds APR because it includes compounding (SEC “Investor.gov”, 2023).
Credit cards usually compound daily, creating the highest EAR among common consumer loans (CFPB, 2022).
FAQ
What is a nominal interest rate?
A nominal rate is the stated yearly percentage that excludes compounding effects (Investopedia, 2023).
How do I find the effective annual rate?
Divide the nominal rate by compounding periods, add 1, raise to the same power, then subtract 1. The tool automates this step.
Why does compounding frequency matter?
More periods mean interest earns interest sooner, pushing EAR higher and total costs or returns upward (Bank of Canada, 2021).
Can EAR equal the nominal rate?
Yes—only when interest compounds once per year; otherwise, EAR exceeds nominal (IRS Publication 550, 2022).
Is APR the same as EAR?
APR omits intra-year compounding. EAR (or APY) includes it, so EAR is always the more accurate cost or yield (SEC “Investor Bulletin”, 2023).
How accurate is this calculator?
It uses the standard actuarial formula and rounds to two decimals—sufficient for personal finance decisions.
Which frequency creates the highest EAR?
Daily compounding produces the highest EAR among typical banking options because it applies interest 365 times a year.
“Compounding is the eighth wonder of the world.” Who said it?
Albert Einstein reportedly praised compounding’s power in that famous quote (Quote Investigator, 2015).
Is this tool helpful?
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