Work out effective annual rate from nominal instantly with clear inputs, formula shown and shareable results.
A nominal rate ignores the fact that interest credited part-way through the year itself earns interest. The effective annual rate (EAR) restates the nominal rate as the single yearly rate that produces the same growth, so quotes with different compounding frequencies become comparable.
Effective annual rate
EAR = (1 + i/m)^m - 1
Because interest paid early in the year compounds for the remaining months. The more frequent the compounding, the wider the gap.
EAR rises but converges to the continuous limit e^i - 1, so monthly to daily makes far less difference than annual to monthly.