What is the difference between Nominal and Effective Rate?

The Nominal Rate is the stated interest rate (e.g., 5%). The Effective Rate (or APY) is the actual return you get after compounding is taken into account. The more frequent the compounding, the higher the Effective Rate.

Why is daily compounding better than annual?

With daily compounding, you earn interest on your interest every single day. With annual compounding, you have to wait a full year to earn interest on your first year's gains. This 'interest on interest' acts faster with higher frequency.

Is APY the same as Effective Annual Rate (EAR)?

Yes, in most personal finance contexts, APY (Annual Percentage Yield) and EAR (Effective Annual Rate) are synonyms. They both represent the total yearly return including compounding effects.

Compound Frequency Converter | APR to APY Calculator | Finmato

Not All Interest Rates Are Created Equal

Bank A offers you 5% interest compounded annually. Bank B offers you 4.9% interest compounded daily. Which one actually pays you more money? If you just looked at the main number, you'd choose Bank A—and you'd be wrong. Our Compound Frequency Converter solves this dilemma by converting everything into a single, comparable number: the Effective Annual Rate (EAR).

Nominal vs. Effective Rate

To compare financial products accurately, you must distinguish between two types of rates:

Nominal Rate (APR)

This is the "headline" rate advertised by banks. It ignores the effects of intra-year compounding.

Effective Rate (APY/EAR)

This is the "real" rate you earn (or pay). It accounts for how often interest is added to the principal.

How Compounding Works

The more frequently interest is compounded, the faster your money grows. A 10% nominal rate results in different effective yields:

Annual Compounding: 10.00% Effective Rate
Semi-Annual Compounding: 10.25% Effective Rate
Monthly Compounding: 10.47% Effective Rate
Daily Compounding: 10.52% Effective Rate

This small difference can add up to thousands of dollars over the life of a mortgage or retirement account.

Savings Accounts

A High-Yield Savings Account (HYSA) might advertise "5.00% APY". Use this tool to work backward and find the nominal interest rate.

Credit Cards

Credit card debt usually compounds daily. A card with a 24% APR actually charges you an effective rate of over 27% per year!

Investment Comparison

Comparing a corporate bond (paid semi-annually) vs a Certificate of Deposit (paid monthly)? Convert both to Effective Annual Rates to see the winner.

Frequently Asked Questions

What is the formula?

The formula for Effective Annual Rate is: EAR = (1 + i/n)^n - 1. Where 'i' is the nominal annual interest rate and 'n' is the number of compounding periods per year.

Does continuous compounding exist?

Yes, it is the theoretical limit where compounding happens every nanosecond. The formula uses the mathematical constant e: EAR = e^i - 1.

Should I care about this for short term loans?

For very short loans (e.g., 1 month), the compounding effect is negligible. But for any multi-year debt (mortgage, student loan) or investment, compounding frequency has a major impact.

Math Accuracy

Calculations use standard financial formulas. Commercial banks may use slightly different day-count conventions (e.g., 360 vs 365 days).

Data Privacy

We do not store your data. This calculator runs entirely in your browser.

Compound Frequency Converter