Effective annual rate
Effective annual rate (also known by its acronym, EAR; alternatively known as equivalent annual rate or EFF%). The effective annual rate is the rate that, under annual compounding, would have produced the same future value at the end of 1 year as was produced by more frequent compounding, say quarterly. If the compounding occurs annually, then the effective annual rate and the nominal rate are the same. If compounding occurs more frequently, then the effective annual rate is greater than the nominal rate.
Definitions
According to Financial Management Theory and Practice by Eugene F. Brigham and Michael C. Ehrhardt (13th edition),
- Effective annual rate (equivalent annual rate, EAR or EFF%). The effective annual rate is the rate that, under annual compounding, would have produced the same future value at the end of 1 year as was produced by more frequent compounding, say quarterly. If the compounding occurs annually, then the effective annual rate and the nominal rate are the same. If compounding occurs more frequently, then the effective annual rate is greater than the nominal rate.
According to Fundamentals of Financial Management by Eugene F. Brigham and Joel F. Houston (15th edition),
- Effective annual rate (equivalent annual rate), EFF% or EAR. The annual rate of interest actually being earned, as opposed to the quoted rate.
Related concepts
- Financial management. A combination of enterprise efforts undertaken in order to procure and utilize monetary resources of the enterprise.
