Interest and growth
Nominal and effective interest rates
Compare offers that compound at different frequencies on a like-for-like basis.
12 minfoundationMembers
Learning objectives
- Convert a nominal annual rate into a periodic rate
- Calculate the effective annual rate (EAR)
- Rank offers with different compounding frequencies
Rates are usually quoted as a nominal annual rate (APR), but interest may be charged or paid monthly or quarterly. The more often interest compounds, the more you really pay or earn over a year.
The effective annual rate (EAR) puts every offer on the same basis: the actual percentage growth over one year.
EAR = (1 + APR ÷ m)ᵐ − 1
- APR
- nominal annual rate
- m
- compounding periods per year
Included with a Formula Quest membership
The rest of this lesson is for members. Members get the full lesson, including its 2 graded exercises, and every other Finance Quest lesson.