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EAR to APR Formula:
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The EAR to APR formula converts the Effective Annual Rate (EAR) to the Annual Percentage Rate (APR) based on the number of compounding periods. This is essential for comparing different loan or investment products with varying compounding frequencies.
The calculator uses the EAR to APR conversion formula:
Where:
Explanation: The formula accounts for the effect of compounding frequency on the stated annual rate, converting the true annual return (EAR) to the periodic rate that when compounded gives the same result.
Details: Understanding the relationship between EAR and APR is crucial for comparing financial products, calculating loan costs, and evaluating investment returns across different compounding schedules.
Tips: Enter EAR as a percentage (e.g., 5.25 for 5.25%), and the number of compounding periods per year (e.g., 12 for monthly, 4 for quarterly, 365 for daily). All values must be valid (EAR ≥ 0, compounds ≥ 1).
Q1: What's the difference between EAR and APR?
A: EAR represents the actual annual return including compounding effects, while APR is the periodic rate that when compounded gives the EAR.
Q2: When should I use this conversion?
A: Use when comparing loans or investments with different compounding frequencies, or when you know the true annual return but need the periodic rate.
Q3: How does compounding frequency affect APR?
A: For the same EAR, more frequent compounding results in a lower APR because the interest is applied more frequently at smaller rates.
Q4: Can APR be higher than EAR?
A: No, APR is always less than or equal to EAR for positive rates. With more frequent compounding, APR decreases while EAR remains constant.
Q5: What are common compounding periods?
A: Common periods include: 1 (annual), 2 (semi-annual), 4 (quarterly), 12 (monthly), 52 (weekly), and 365 (daily).