Effective annual rate (EAR), also called APY on deposits, is the actual return you earn in one year after compounding.
About this calculator
Effective annual rate (EAR), also called APY on deposits, is the actual return you earn in one year after compounding. A bank FD quoted at 7% compounded quarterly does not pay exactly 7% — it pays slightly more because each quarter's interest starts earning interest.
Use EAR when comparing products with different compounding rules: SBI FD at 7% quarterly vs a corporate bond at 7.1% annual vs a savings account at 6.5% monthly. The nominal rate alone misleads you. Convert each to EAR and pick the highest.
On the borrowing side, lenders also compound — credit card interest at 3% per month is far above 36% EAR. Pair EAR with the [[fd]] calculator for maturity amounts, [[sip]] for recurring investments, and [[emi]] when comparing loan offers. For tax on interest income, see [[income-tax]].
Common uses
- Compare two bank FDs with different compounding frequencies
- Check true yield on a savings account with monthly interest credit
- Convert credit card monthly rate to annual effective cost
- Evaluate corporate deposit vs government bond on equal footing
- Academic finance homework on nominal vs effective rates
Frequently asked questions
What is the effective annual rate on a 7% FD compounded quarterly?
EAR = (1 + 0.07/4)^4 − 1 ≈ 7.19%. The bank quotes 7% nominal but you effectively earn 7.19% per year because interest is added every quarter and starts compounding.
Is APY the same as EAR?
For savers, APY (annual percentage yield) and EAR mean the same thing — the actual yearly return after compounding. Banks display APY on savings products; finance textbooks call it EAR.
Why does daily compounding give a higher EAR than monthly?
More compounding periods mean interest is reinvested sooner within the year. The difference between daily and monthly on a 7% rate is small (about 0.01 percentage points) but daily always equals or exceeds monthly EAR.
How do I compare a 7.5% simple-interest scheme to compounded FD?
Simple interest pays no intra-year compounding, so 7.5% simple equals 7.5% EAR only if paid once at year-end. A 7.5% compounded quarterly FD beats it. Convert both to EAR before deciding.