Effective Annual Interest Rate

The Effective Annual Interest Rate (EAR) is the interest rate taking into consideration the effects of compounding. It can be applied to loans, savings or investments. The EAR of a 5% headline coupon rate on a bond is 5.0625% if payments are semi-annual, 5.0945% for quarterly, and 5.1162% if coupons are paid monthly. The EAR is a standardised way of assessing the return on an investment or the interest cost of a loan. EAR will be higher than the stated interest rate in circumstances where interest payments are due more often than once a year.