Description

EffAnnRateλ calculates the Effective Annual Rate (EAR) — the true annual interest rate when compounding occurs more than once per year. It converts a periodic interest rate into an equivalent annual rate that accounts for compounding.  EffAnnRateλ uses this formula:

(1 + AnnualRate/PeriodsPerYear) ^ PeriodsPerYear -1

This reveals the true cost or return of an interest rate when compounding is factored in.

EffAnnRateλ is an essential financial comparison tool that reveals the true annual rate when interest compounds multiple times per year. It's critical for:

• Consumers comparing loans, credit cards, or savings accounts

• Financial analysts building accurate models

• Compliance teams calculating required APY disclosures

• Anyone who needs to compare rates with different compounding frequencies on an equal basis

Example

In this example the bank offers our deposit of $10,000 at 12% stated interest rate compounded monthly. The corkscrew account shows the impact of compounding 12% monthly. At the end of 12 months, the principal has increased by 1,268; thus, the EAR is 12.68% as compared to the quoted 12%: