How this number is made
Two accounts can both say 6% and pay different amounts. The one that compounds monthly pays interest on interest inside the year. The effective annual rate is the single yearly percent that matches that result.
- Type the nominal rate, the one that is not already called APY, AER, or effective.
- Match the compounding on the disclosure. Monthly is twelve. Daily is 365 on this page, not 360.
- The sample amount is only a picture of one year. It is not a term-deposit maturity over many years.
Formula
Effective annual rate = (1 + nominal rate ÷ n) ^ n − 1, where n is the number of compounds in a year.
Worked example
6% compounded monthly is an effective rate of 6.17%. On $1,000 that is $61.68 of interest in the year, not $60.
Questions
Is APR the same as this?
A savings APR is often the nominal rate. A loan APR in some countries folds in fees and is already a price of credit. Don’t run a fee-loaded loan APR through this page and expect the bank’s figure.
What if they already quote the effective rate?
Then you do not need this conversion. Compounding it again double-counts. The term-deposit page wants the nominal rate plus the frequency.