1. What is Equivalent Annual Interest Rate?

The Equivalent Annual Interest Rate (EACR) converts a periodic interest rate to an equivalent annual rate, accounting for compounding effects. It helps compare different investment or loan options with varying compounding periods on an annual basis.

2. How Does the Calculator Work?

The calculator uses the EACR formula:

Where:

• \( EACR \) — Equivalent Annual Interest Rate (decimal)
• \( r \) — Periodic interest rate (decimal)
• \( n \) — Number of compounding periods per year

Explanation: The formula calculates the effective annual rate by considering the compounding effect over multiple periods within a year.

3. Importance of EACR Calculation

Details: EACR is crucial for comparing financial products with different compounding frequencies, understanding the true cost of loans, and evaluating investment returns accurately across different compounding scenarios.

4. Using the Calculator

Tips: Enter the periodic interest rate as a decimal (e.g., 0.05 for 5%), and the number of compounding periods per year. All values must be valid (rate ≥ 0, periods ≥ 1).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between nominal and equivalent annual rate?
A: Nominal rate doesn't account for compounding, while equivalent annual rate reflects the actual annual return including compounding effects.

Q2: How do I convert percentage to decimal for input?
A: Divide the percentage by 100 (e.g., 5% becomes 0.05, 2.5% becomes 0.025).

Q3: When is EACR most useful?
A: When comparing loans or investments with different compounding periods (monthly, quarterly, daily) to make apples-to-apples comparisons.

Q4: Can EACR be negative?
A: Yes, if the periodic rate results in an overall loss when compounded annually.

Q5: What are common compounding periods?
A: Common periods include: annually (n=1), semi-annually (n=2), quarterly (n=4), monthly (n=12), weekly (n=52), daily (n=365).